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THE ROLE OF ACCOUNTING IN 
COMPUTER-BASED INFORMATION SYSTEMS 



By 



SURENDRA PRAKASH AGRAWAL 



A DISSERTATION PRESENTED TO THE GRADUATE COUNCIL OF 

THE UNIVERSITY OF FLORIDA 
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE 
DEGREE OF DOCTOR OF PHILOSOPHY 



UNIVERSITY OF FLORIDA 



1973 



ACKNOWLEDGEMENTS 



The writing of a dissertation is an experience. It 
requires a total commitment on the part of the writer, and 
all the help he can get -- from his family, friends, col- 
leagues, teachers, and, above all, his major advisor. It 
is but a small acknowledgement to thank all the people, with 
or without mentioning them by name, who have provided assis- 
tance and encouragement over the long weeks and months spent 
on the job. My greatest gratitude is to Professor Lawrence 
J. Benninger, Chairman of the Supervisory Committee, who 
worked patiently and helpfully through my many drafts. The 
other members of the committee. Professors Ralph H. 
Blodgett and M, S. Tysseland, have been instrumental in 
giving a certain nonaccounting perspective to the study, 
and I wish to record my appreciation to them. 

I am especially thankful to my wife and our daughters 
for sharing with me the trials and tribulations of a grad- 
uate student's life so far away from home. The courage 
shown by my little daughter during her own affliction has 
proved to be a source of great strength to all of us. 



ii 



TABLE OF co:;tents 



Page 

ACKNOWLEDGEMENTS ii 

LIST OF TABLES ix 

LIST OF FIGURES x 

ABSTRACT xi 

CHAPTER 

I INTRODUCTION 1 

The Problem under Study 1 

Recognition of the Problem 

in Literature 3 

An Approach to Solve the Problem Posed . 10 

Research Methodology and Scope 10 

Some Limitations to the Scope of 

the Study 13 

Organization of the Study 14 

II SOME BASIC CONCEPTS, DEFINITIONS, 

AND INTERRELATIONSHIPS 16 

Purpose and Organization of the Chapter. 16 

An Introduction to Systems 17 

General Systems Theory 17 

The Concept of Systems 20 

The Systems Approach 24 

Business Organizations from the 

Systems Point of View 25 

Purpose of the Organization 26 

Structure of the Organization .... 27 
Input, Output and Process of the 

Organization 28 

Component Subsystems of a Business 

Organization 28 

The Decision Making System 30 

Purpose of the System 31 

Structure of the System 31 



iii 



TABLE OF CONTENTS (continued) 



Page 

CHAPTER 



II (continued) 

Process of the System 31 

Input of the System 33 

Output of the System 34 

The Information System 35 

Purpose of the System 35 

Structure of the System 40 

, Process of the System 40 

Input of the System 41 

Output of the System 41 

The Operations System 43 

An Overview of the Systems • 

Characteristics 44 

Summary of the Chapter 44 

III ACCOUNTING AS . AN INFORMATION SYSTEM ... 47 

Purpose and Organization of the 

Chapter 4 7 

Accounting from the Systems 

Point of View 48 

Purpose of Accounting 49 

Structure of Accounting 55 

Process of Accounting 55 

Financial Accounting and 

Management Accounting 56 

General Attitude of Accountants . . 57 
Professional Judgment of 

Accountants 60 

Input of Accounting 61 

Output of Accounting 62 

Dynamic Development of Accounting . . 64 
A Model of Accounting as an 

Information System 64 

Specialized Skill and Expertise 

of Accountants 66 

Limitations of Accounting 67 

Information Needs of the 

Decision Making System 67 

Information Needs of the Operations 

System 68 

Information Needs of External Users . 68 

Basic Reasons for the Limitations 

of Accounting 69 



iv 



TABLE OF CONTENTS (continued) 



Page 

CHAPTER 

III (continued) 

Improvements in Accounting Suggested 

in Literature 70 

Development of Decision Models 

by Accounting 71 

Adoption of New Techniques and 

Procedures 73 

, Changes in the Standard of 

Reliability 73 

An Evaluation of the Proposals .... 74 

Summary of the Chapter 75 

IV MANAGEMENT INFORMATION SYSTEMS 78 



Purpose and Organization of the 

Chapter 78 

The Concept' of MIS 79 

A Brief Historical Background .... 79 

Characteristics of MIS 81 

Total Systems and Integrated 

Systems 83 

Functions of MIS 85 

Characteristics of MIS 85 

An Operational Definition of MIS . . 86 

MIS from the Systems Point of View ... 87 

Purpose of MIS 87 

Structure of MIS . . 88 

Input of MIS 88 

Process of MIS 89 

Output of MIS 90 

Dynamic Development of MIS 90 

A Model of MIS 91 

Specialized Skills Required for 

MIS Operations 93 

MIS and the Computer 93 

MIS and Operations Research 97 

Limitations and Deficiencies of MIS . . 99 
Overabundance of Irrelevant 

Information 100 

Inadequate Knowledge of 

. Information Needs 101 

A Communication Gap Between the 
Systems People and Users 

of Information 101 



V 



TABLE OF CONTENTS (continued) 



Page 

CHAPTER 



IV (continued) ^ 
Inability of Decision Makers to 

Specify Their Informational Needs . . 103 

Exclusion of Judgmental Factors . . . 103 

Inadequate Control over Input .... 104 

Lack of Flexibility in MIS 105 

Incompatibility of Sophisticated 
Information with Management 

Capabilities 105 

Basic Reasons of the Deficiencies 

of MIS 106 

Improvements in MIS Suggested in 

Literature 107 

Introduction of a New Human 

Element in MIS 107 

Acquisition of Skills in EDP 

and Functional Areas 109 

Source Data Automation 110 

Fractionalization of MIS ill 

An Evaluation of the Proposals .... 112 

Summary of the Chapter 114 

V A SUGGESTED MODEL: THE CONTROLLED 

INFORMATION SYSTEM 116 

Purpose and Organization of the 

Chapter 116 

Characteristics of a Good Information 

System 117 

Capability to Develop Various 

Types of Information 117 

Capability to Communicate the 

Required Information 118 

Flexibility 118 

Feasibility 119 

Necessity of a Man/Machine System . . . 119 
The Model of Controlled Information 

System 121 

Input Subsystem 124 

Processing Subsystem 127 

Output Subsystem 129 

Developm.ental Subsystem 132 

Specialized Skill Requirements 133 

Information Control 133 

• Computer Operations 134 

Operations Research 134 



vi 



TABLE OF CONTENTS (continued) 



Page 

CHAPTER 

V (continued) 

Anticipated Problems 135 

Feasibility of the Discipline 

of Information Control 135 

Communication Gap Between Systems 

People and Decision Makers 136 

Time Dimension of the System 137 

Controlled Information System and 

Total Systems Concept 137 

Evaluation of Controlled Information 

System 140 

Criteria of a Good Information 

System 140 

Dearden's Five Questions 142 

Summary of the Chapter 144 

VI THE SUGGESTED ROLE OF ACCOUNTING 

IN CONTROLLED INFORMATION SYSTEMS .... 147 



Purpose and Organization of the i 

Chapter . 147 

Role of Accounting Suggested in 

Literature 148 

An Overall Evaluation of the 

Proposals 151 

Role of Accounting in Controlled 

Information Systems 151 

Control of Input 152 

Manual Processing of Data 154 

Control of Output 157 

Receipt and Interpretation of 

Feedback 158 

Participation in Operations 

Research 159 

IVho'll Be in Charge? 161 

Implications for Accountants' 

Training and Education 162 

Some Standards and Guidelines 164 

Standards for Data and Information . . 164 
Guidelines for Receiving Feedback 

from Users 170 

Guidelines for Analyzing Informa- 
tion Needs 171 

Summary of the Chapter 173 



vi i 



TABLE OF CONTENTS (continued) 

Page 

CHAPTER 

VII SUMI-IARY AND CONCLUSIONS 175 

Areas for Further Research 182 

SELECTED BIBLIOGRAPHY 184 

BIOGRAPHICAL SKETCH 195 



viii 



LIST OF TUPLES 

Table • Page 

1 Characteristics of Systems Within 

a Business Organization 45 



• / 

ix 



LIST OF FIGURES 

Figure . Page 

1 A model of the accounting information 

system 65 

2 A model of the management information 

system 92 

3 A model of controlled information 

system 123 



X 



Abstract of Dissertation Presented to the Graduate Council 
of the University of Florida in Partial Fulfillment of the 
Requirements for the Degree of Doctor of Philosophy 

THE ROLE OF ACCOUNTING IN 
COMPUTER-BASED INFORMATION SYSTEMS 

By : 
Surendra Prakash Agrawal 
June, 1973 

Chairman: Dr. Lawrence J. Benninger 
Major Department: Accounting 

Traditionally, accounting has served as the only or 
major information system of business organizations, but in 
recent years many institutions have set up computer-based 
management information systems as an alternative to it. 
There is no specific function assigned to accountants in 
such systems; hence their growing use is a matter of grave 
concern for the future of accounting as a distinct disci- 
pline. Suggestions given in the literature to enable account- 
ing to face this challenge appear to be unsatisfactory. This 
study, therefore, has addressed itself to the problem of 
determining the role which accountants can perform effec- 
tively and profitably, as specialists in their own rights, 
in computer-based information systems. 

Preliminary to a solution of this problem, an analysis 
of the capabilities and deficiencies of both accounting and 
management information systems was made. A major conclusion 

xi 



drawn was that neither of these models is able to serve 
appropriately as an effective information system of business 
organizations in the modern environment. t\Tiile accounting 
develops information which meets with certain qualitative 
standards, its scope is limited primarily by its historic 
emphasis upon financial information. Moreover, accountants 
in general are not -- and are unlikely to become -- suffi- 
ciently versatile in the various techniques of scientific 
management and hence do not ordinarily develop sophisticated, 
quantitative information needed by many users. On the other 
hand, while management information systems utilize such 
mathematical techniques as model building, programmed deci- 
sion making, and problem solving, they lack flexibility, 
and there seems to be an inadequate insistence on the quali- 
tative aspects (such as reliability) of information devel- 
oped. Moreover, they do not have people who can effectively 
communicate with and understand the needs of users. Further- 
more, the recipients of information are at times unable to 
utilize the information supplied by such systems because of 
an inadequate sophistication in their own decision models. 

It would appear from the foregoing that an efficient 
information system requires a close coordination of men and 
machines. The model of the controlled information system 
developed in this study uses this idea and consists of com- 
puters, operations research methods, and information control- 
lers. Information controllers have the responsibility for 

xii 



controlling its input and output and ensuring that they meet 
with the specified standards of reliability, usability and 
authority. Besides, they also carry out those manipulations 
of data that can not be performed on the computer, receive 
and interpret feedback from users, and help in operations 
research. 

It is recommended that in the suggested model accoun- 
tants act as information controllers which would involve 
functions similar to those discharged by them in accounting 
systems today. To do this, however, they would need to 
expand the area of their interest to cover all types of data 
and information. Their education and training would empha- 
size such matters as the analysis of informational require- 
ments, understanding of data needed therefor, and manual 
manipulation of various types of data; it should also famil- 
iarize them with the limitations and possible applications 
of computers and operations research. 

Upon the adoption of the suggestions contained in this 
study it is expected that accountants would continue to 
render specialized services to business organizations, and 
such organizations would be able to take full advantage of 
their information systems. 



xiii 



CHAPTER I 
INTRODUCTION 



The Problem Under Study 

Traditionally, accountants have performed the function 
of collecting and developing information in business organi- 
zations. Until but a short time ago, information supplied 
by accounting was usually considered to be adequate for pur- 
poses of management. However, recent developments in organ- 
ization and management theories and practices have created 
a need for various types of information which are not con- 
sidered to be within the province of accounting. Organiza- 
tions using modern management techniques are, therefore, 
obliged to seek some alternative means to obtain the required 
information. Developments in the application of computers 
and mathematical techniques have been found to be helpful in 
the provision of such information. Their utilization has 
given rise to computer-based information systems (often 
referred to as management information systems). Such sys- 
tems develop considerable quantities of sophisticated infor- 
mation, and often the information which has been historic- 
ally suDplied by accounting is one of their products (or 
by-products). In general, these systems are not managed by 



1 



2 



accountants, and, even where accountants do participate in 
their oneration, their exact role is not well defined. In 
view of the fact that the use of computer-based information 
systems is grooving and is expected to grow, such a situation 
becomes untenable for accountants. If accounting is to sur- 
vive as a distinct discipline, its members must render some 
specialized services which no other professionals can offer. 
The problem with which this study is concerned is, there- 
fore, the determination of the role which accountants can 
perform effectively and profitably, as specialists in their 
own rights, in computer-based information systems of busi- 
ness organizations. 

Before an appropriate solution to this problem may be 
essayed, a further difficulty must be recognized. Most 
management information systems established in business 
organizations have failed to prove up to their expectations 
in the supply of information actually required and used by 
managements. There remains, therefore, a need to develop a 
model of an information system which would be able to sat- 
isfy demands for various types of information. Accordingly, 
this study will first endeavor to specify a^ model of a 
computer-based information system which can be expected to 
carry out its function effectively and then to determine 
the role, if any, which should be assigned to the accountant 
within such a system. 

In the absence of a clearly defined role for accounting 
in the new setting of computer-based information systems. 



3 



there also appears to be confusion concerning the appropriate 
educational background for today's accountant. The trend 
seems to be to expand the scope of the accountant's educa- 
tion with a view towards making him an expert in several 
fields, such as computer technology and operations research, 
as well as continuing the technical accounting instruction 
presently given accountants. There, however, appears to be 
such a diversity of knowledge in these areas that it is 
doubtful that a person could acquire expertise in all of 
them after devoting a reasonable amount of time and effort. 
The scope of accountants' education should be determined 
realistically, keeping in mind the constraints concerning 
capabilities of individuals and the time and effort they may 
be expected to devote in order to become accountants. This 
problem can be solved only after the role of accountants in 
computer-based information systems has been determined in 
precise terms, because it will then be possible to state 
what specialized skills they would actually need. This 
study will accordingly attempt to draw implications for the 
training and education of accountants from the role sug- 
gested for them. 

Recognition of the Problem in Literature . 

Considerable attention has been given in the accounting 
literature to the problem under study here. The new develop- 
ments are seen by the various writers either as a threat or 
as a challenge to accountants. The Committee on Information 



4 



Systems, 1970-71, expressed the view that the accounting 
department may be one of the first to vanish in the func- 
tional reorganization caused by the new developments, and 
new information departments would evolve.'^ Swyers thinks 
that, as a result of the implementation of an integrated 
management information system, the accounting information 
system would cease to exist as a separate entity. Accord- 
ing to Horngren, soothsayers of doom foresee a takeover of 
the internal accounting function by mega- information special- 
ists who would not label such work as accounting but as 
information processing and reporting. External reports 
would be the by-products of a management information system 

■7 

(not an accounting system). Hartley finds truth in the 
argument that accounting is being replaced by the total 
information systems.^ 

On the other hand, Churchill and Stedry observe that 
the new areas of management and behavioral sciences and 
information systems technology offer a challenge and an 

1. American Accounting Association's Committee on 
Information Systems, 1970-71, "Report of the Committee on 
Information Systems," Accounting Review, Supplement to 
Volume XLVII (1972), p. 206. 

2. William E. Swyers, "Integrated Information Systems 
and the Corporate Control lership Function," Management 
Accounting . L (October, 1968), p. 19. ' 

3. Charles T. Horngren, "The Accounting Discipline in 
1999," Accounting Review , XLVI (January, 1971), p. 4. 

4. Ronald V. Hartley, "Operations Research and Its 
Implications for the Accounting Profession," Accounting 
Review, XLIII (April, 1968), p. 327. 



t 



5 



opportunity. "Someone must rise to it. By tradition and 
by proven record it ought to be the accountants."^ The 
Committee on Information Systems, 1969-70, states that 
accounting in the broad sense of the term can and should 
rise to the challenge and opportunities of the developing 
information technology and take the lead in information 
management.^ SvN^yers thinks that the controller should be 
considered a leading contender for the post of the director 
of management information.^ Staats observes that manage- 
ment-oriented accountants are the logical choice to direct 
and operate management information systems, whether the 
responsibility is placed in the controller's organization 
or in another group. Similarly, Joplin finds the account- 
ant a logical choice and a qualified candidate to manage the 
computer-based management information system.^ Horngren's 
prophets of power and glory pin the accounting label on all 
quantitative information needed for decision making. "^^ 



5. Neil C. Churchill and Andrew C. Stedry, "Extending 
the Dimensions of Accounting Measurement," Mana gement Ser- 
vices , IV (March-April, 1967), p. 22. 

6. American Accounting Association's Committee on 
Information Systems, 1969- 70 , "Accounting and Information 
Systems," Accountin g Review, Supplement to Volume XLVI 

(1971), p.-ur. ^ — — 

7. Swyers , p. 20. 

8. Elmer B. Staats, "Information Needs in an Era of 
Change," Management Accounting , L (October, 1968), p. 15. 

9. Bruce Joplin, "Can the Accountant Manage EDP?" 
Management Accounting . XLIX (November, 1967), p. 3. 



10. Horngren, p. 4. 



6 



In order that the accountant may face the challenge of 
the new developments successfully, various suggestions have 
been made as to how he can prepare himself adequately for 
the task. Hein observes that while the future of the 
accounting function seems reasonably well assured, the prog- 
nosis for the accountant is not quite so favorable -- that 
is, unless the accountant takes some significant steps to 
ensure his survival. The background capabilities considered 
necessary by Hein are: formal training in business subjects 
with concentration in accounting, familiarity with (and 
masteryof most of) mathematics, statistics, simulation, 
operations research, and electronic data processing (EDP) . 
"It is perhaps a trite truism to say the more the better. "''"■^ 
To fill the broader role, Jasper mentions the need to broaden 
the accountant's knowledge in the fields of statistics, com- 
puters, systems analysis, operations research, and behavioral 
science (effective communication and human activation). 
Staat's list includes computers, communication facilities 
and techniques, economics, systems analysis and related 
mathematical techniques, psychology, and sociology."'"^ Joplin 
thinks that the accountant should expand his knowledge and 

11. Leonard W. Hein, "The Management Accountant and the 
Integrated Information Systems," Management Accounting, XLIX 
(June, 1968), pp. 36, 37-38. 

12. Harold W. Jasper, "Future Role of the Accountant," 
Management Services , III (January- February , 1966), pp. 52-53. 

13. Staats, p. 15. 



background in understanding EDP applications. Beyer 
thinks that there is formidable competition for the role of 
the director of management information, and states that the 
accountant has to develop his understanding of the capabili- 
ties -- and limitations -- of the information disciplines 
participating in functioning systems. ''^^ Firmin and Linn 
recommend that accountants become operational in mathematics 
statistics, and other aspects of information technology, and 
comprehend fundamental concepts of behavioral science. 
Gynther's list of educational fields for accountants in- 
cludes computer language, quantitative methods, operations 
research, quantification of variables, human behavior, finan 

cial accounting theory, managerial accounting theory, and 

1 7 

business finance theory. 

To summarize, various writers have mentioned the fol- 
lowing fields of knowledge in which accountants need to 
acquire expertise so as to be able to face the challenge 
posed by technological developments and advancement of 



14. Joplin, p. 3. 

15. Robert Beyer, "Management Information Systems: 
Who'll Be in Charge?" Managem ent Accounting, XLVIII (June, 
1967), p. 8. 

16. Peter A. Firmin and James J. Linn, "Information 
Systems and Managerial Accounting," Accounting Review, XLIII 
(January, 1968), p. 81. 

17. Reg S. Gynther, "The Management Accountant of the 
Future," Accountants' Journal (New Zealand), LI (August 
1972) , pp. 5-6. * 



8 



knowledge : 

(1) Accounting: financial and managerial ^ 

(2) Business, Finance, and Economics 

(3) Quantitative Methods: mathematics, statis- 
tics, and operations research 

(4) Computers and Communication Equipment 
C5) Behavioral Sciences 

(6) Systems Analysis, and other areas relating 
to information systems. 

Once the accountant acquires the required expertise in 
these fields, he will presumably be adequately equipped to 
carry out his expanded role. The writers in this area, how- 
ever, are almost uniformly silent on the question as to what 
specific functions the expanded role will involve. A number 
of vague references may be found as to the accountant's 
taking charge of the management information system,''"^ or his 
carrying out a role within the total area of information 
systems in association with the other professionals;''"^ but 
insufficient attention seems to have been given to this 
question in the literature. The Committee on Information 
Systems, 1969-70, does mention that the real issue is the 
extent to which accounting should be involved in the formal 



18. For example, see Beyer, pp. 3-4. 

19. For example, see Gynther, p. 3; 

H. Bruce Joplin, "The Accountant's Role in Manage- 
ment Information Systems," Journal of Accountancy. CXXI 
(March, 1966), p. 44. ^ 



9 



information function but makes no explicit recommenda- 

^.20 
tion. 

Doubt has also been expressed in literature as to the 

feasibility of an individual acquiring expertise in such a 

variety of fields. The Committee on Information Systems, 

1969-70, raised this specific question: "... at the career 

level, can you train a complete accountant - information 

manager in four or five years?" and responded with an empha- 
2 1 

tic no. Similarly, the Committee on Foundations of 

Accounting Measurement, 1969-70, found that the intellectual 

skills required to be an "expert" in accounting are not 

easily transferred to the whole area of management informa- 
2 2 

tion systems. Dearden thinks that the true management 
information systems expert does not and can not exist -- no 
man can possess a broad enough set of special skills. 

It is clear, therefore, that although the problem of 
determining the role of accounting in computer-based infor- 
mation systems has been widely recognized, there is no 
agreement as to how to solve the problem. Solutions offered 
by some of the writers have been found either unacceptable 



20. See the report of the Committee, p. 349. 

21. Ibid . , p. 349. 

22. American Accounting Association's Committee on 
Foundations of Accounting Measurement, 1969-70, "Report of 
the Committee on Foundations of Accounting Measurement," 
Accounting Review, Supplement to Volume XLVI (1971), p. 11. 

23. John Dearden, "MIS Is a Mirage," H arvard B usiness 
Review , L (January-February, 1972), p. 93. ' — 



10 

or impracticable by others. There is, consequently, a need 
to study this problem further with a view to finding an 
acceptable solution. 

An Approach to Solve the Problem Posed 

Several steps are required to find a proper solution to 
the problem under study. It will first be necessary to 
determine the functions that an information system of a 
business organization is expected to carry out and to antici- 
pate difficulties which may be faced in its implementation. 
A suitable model of such a system will have to be developed, 
and the specialized skills required for its successful oper- 
ation determined. It would then be possible to analyze 
whether there is need for an accountant in such a system 
and, if so, what his role should be. Finally, assuming a 
need for an accountant is demonstrated, education and train- 
ing requirements for accountants may be determined in more 
precise terms. 

Research Methodology and Scope 

In the field of accounting, all methods of research are 
considered to be acceptable . The most appropriate method 
will depend upon the nature of the problem. One of the 



24. American Accounting Association's Committee on 
Research Methodology in Accounting, 1970- 71 , "ReTDort of the 
Committee on Research Methodology in Accounting,'' Accountin 
Review, Supplement to Volume XLVII (1972), p. 406. 



11 



primary purposes of this study is to develop a new model of 

an information system which may be placed in the category 

of "invention of new systems." The Committee on Internal 

Reporting and Measurement has recently given specific con- 

2 5 

sideration to this type of research. While the principal 
emphasis of the Committee is on the scientific method in- 
volving formation and testing of hypotheses, it finds that 
research efforts concerning invention of new systems can be 
conducted in an optimal manner without any hypothesis state- 
ment. It also recommends that deductive or inductive logic 
should be employed in building general models where possible 
The Committee, however, mentions that the method of intui- 
tion (that is, accepting something as true because it is 
self-evident or agrees with intuitive reason) may also be 
useful in such cases. 

The model to be developed in this study will be essen- 
tially normative. The Committee on Research Methodology in 
Accounting has given consideration to such models. In the 
report of this Committee, Yu j i Ijiri states that the process 
of constructing normative models involves goal assumptions 
and deduction. Properties that the model must have are 
deduced from the assumed goals. He also specifies the appro 
priate defense for a normative model: a demonstration that 
certain benefits are derived if the reality is changed so 

25. American Accounting Association's Committee on 
Internal Measurement and Reporting, 1971-72, "Report of the 
Committee on Internal Measurement^ and Reporting," Mimeo- 
graph copy, pp. 6, 13. 



12 



that it fits the specifications of the model, where benefits 
are defined in relation to the assumed goals. Such a demon- 
stration may be made either by logically showing the superi- 
ority of the state that can be created by using the model, 
or by demonstrating this superiority empirically. Further- 
more, feasibility of a normative model is an important part 

2 6 

of its defense. 

The methodology of research adopted in this study will 
include both induction and deduction. However, no formal 
propositions or hypotheses will be utilized. Induction will 
be employed mainly in the development of the objectives 
which must be achieved by the system. Such a process will 
include an analysis of the deficiencies observed in the oper- 
ations of the systems presently used by business organiza- 
tions, particularly those of management information systems. 
In order to perform this analysis, reliance will be placed 
upon results of surveys already made, case studies found in 
the literature, and general statements made by people having 
experience in the field of systems management. Reading the 

literature is considered as an indirect but often effective 

2 7 

way of observing the phenomena. It appears that reference 
to the considerable body of literature is an effective way 
to learn what is happening in the real world operation of 

26. Yuji Ijiri, "The Nature of Accounting Research," 
in the "Report of the Committee on Research Methodology in 
Accounting," pp. 448-449. 

27. Ibid. , p. 44 7. . ' - ' ■ • 



13 



management information systems. A direct empirical study 
of one, or even a few, such systems would be extremely 
limited in scope and would, therefore, be insufficient to 
provide a basis for making generalizations about the nature 
and causes of deficiencies in their operation. An attempt 
will also be made in this study to show that the model of 
the information system to be developed and the role of 
accounting to be suggested therein would result in the 
achievement of objectives which are not achieved by existing 
models, and that such a system would be feasible. 

Some Limitations to the Scope of the Study 

In pursuing this study several limitations have been 
placed on its scope. 

(1) Business organizations which have been considered 
in this study are those that are, or can be, organized on 
the basis of functional specialization. Organizations where 
such specialization is not possible or necessary, such as 
"one-man" type business firms and fully automatic plants, 

do not need distinct information systems. 

(2) This study is limited to those organizations that 
use computer-based information systems. It is assumed that 
the accountant does not face a serious challenge to his 
"present relative position" in organizations not utilizing 
computers or other advanced techniques. 



1* 



14 

(3) Considerable attention has been paid in the account- 
ing literature to the contributions that the accountant can 
make in the designing phase of a computer-based information 
systen. However, verv little attention seems to have been 

given to the role of accounting in the operation of such a 
2 8 

system; this study will primarily aim at specifying that 
role. 

Organization of the Study 

The organization of this study follows closely the 
steps indicated earlier under the approach to solve the 
problem. Chapter II will be concerned primarily with the 
importance of information in a business organization and the 
functions that an information system ought to perform. 
Chapters III and IV will study general models of information 
systems which are presently utilized by organizations, namely 
accounting and management information systems. An attempt 
will be made to understand the structure and process of 



28. Even in the studies relating to the impact of com- 
puters or management information systems on business organi- 
zations, no specific consideration seems to have been given 
to accounting or accountants. For example, see: 

Harold M. Sollenberger , Major Changes Caused by 
the Implementation of a Management Information Svstem , N. A . A . 
Research Monograph ^4 ^New York: National Association of 
Accountants, 1968); 

Roger C. Vergin, "Computer Induced Organization 
Changes," MSU Business Topics , XV (Sununer, 196 7), pp. 61-68. 



15 

these systems as well as specialized skills required for 
their operations. Deficiencies of these models will be 
noted, and an analysis will be carried out to determine 
their basic causes. Suggestions made in the literature to 
overcome these deficiencies will also be evaluated. In 
Chapter V, a model of the information system which may be 
expected to achieve the stated objectives and to avoid the 
observed deficiencies will be suggested. Specialized skills 
needed for the successful implementation of such a model 
will also be mentioned. Chapter VI will be concerned with 
the role that accountants may play in the operation of the 
suggested model and the implications of the suggested role 
of accounting upon the education and training of accountants. 
Furthermore, the possibility of setting forth standards and 
guidelines useful to accountants in their new role will be 
explored. Chapter VII will summarize the major findings of 
this study. 



CHAPTER II 

SOME BASIC CONCEPTS, DEFINITIONS 
AND INTERRELATIONSHIPS 

Purpose and Organization of the Chapter 

The purpose of this chapter is to consider some of the 
concepts, definitions and interrelationships essential to a 
basic understanding of the nature and necessity of informa- 
tion and information systems. In keeping with the modern 
trends of thinking in the field of organization theory and 
other related areas, the systems approach will be adopted 
in an attempt to acquire such an understanding.''" 

This chapter will begin with a resume of general sys- 
tems theory. An attempt will then be made to understand 
what is meant by systems and systems approach, followed by 
an analysis of business organizations from the systems point 
of view. The nature, necessity and importance of informa- 
tion for systems in general, and for business organizations 
in particular, will be discussed. Finally, the component 
subsystems of a business organization, which include its 
information system, vv^ill be analyzed. 



1. For a brief discussion of this trend, see pp. 25-26. 



16 



17 

An Introduction to Systems 

— ^ 

In order to utilize the systems approach it is neces- 
sary to have at least an elementary comprehension of general 
system's theory, the concept of systems, and the meaning of 
the systems approach. This section deals with a presenta- 
tion of these. 

General Systems Theory 

General systems theory is concerned with developing a 

systematic, theoretical framework for describing general 

2 

relationships of the empirical world. It aims at pointing 
out similarities in the theoretical constructions of differ- 
ent disciplines, where they exist, and to develop theoreti- 
cal models having applicability to at least two fields of 
study. Its subject matter is the formulation and deriva- 
tion of those principles which are valid for "systems" in 
general. Many systems are structurally similar when con- 
sidered in abstract. General systems theory, however, is 



2. The discussion in this paragraph is based primarily 
on the ideas contained in the following works: 

Ludwig von Bertalanffy, "General Systems Theory," 
General Systems , I (1956), pp. 1-10; 

Kenneth E. Boulding, "General Systems Theory -- The 
Skeleton of Science," Managem ent Science, II (April, 1956), 
pp. 197-208 ; 

A. D. Hall and R. E. Fagen, "Definition of System," 
General Systems . I (1956), pp. 18-28; 

Richard A. Johnson, Fermont E. Kast and James E. 
Rosenzweig, "Systems Theory and Management," Management 
Science, X (January, 1964), pp. 367-384. 



18 

not a collection of vague analogies. It is a useful tool 

to provide models that can be used in, and transferred to, 

different fields. It develops a framework of general theory 

to enable one specialist to catch relevant communications 

from others. It is an interdisciplinary movement, which has 

resulted in the development of "multisexual" interdisciplines 

and hybrid disciplines. 

Two approaches to the organization of general systems 

3 

theory have been mentioned in the literature. 

Developing general models .- -Look over the empirical 
universe and pick out common phenomena which are found in 
many different disciplines , and seek to build up general 
theoretical models relevant to these phenomena. 

Structuring a hierarchy of level s .- -Arrange the empiri- 
cal fields in a hierarchy of the organizational complexity 
of their basic "individual" or unit of behavior, and try to 
develop a level of abstraction appropriate to each. Bould- 

ing has suggested the following arrangement of levels of 

4 

theoretical discourse. 

First: Static structures -- frameworks 

Second: Simple dynamic systems -- clockworks 

Third: Control mechanisms or cybernetic 
systems -- the thermostat 



3. See Boulding, p. 200; and Johnson et al . , p. 369. 

4. Boulding, pp. 202-205. 



19 



Fourth: Open systems or self-maintaining -, 
structures -- the cell 

Fifth: Genetic- societal level, such as that 
of plants 

Sixth: Animal level 

Seventh: Human level . 

Eighth: Social organizations 

Ninth: Transcendental systems. , 
Boulding states that this hierarchy of systems gives some 
idea of the present gaps in theoretical and empirical knowl 
edge. Adequate theoretical models extend up to about the 
fourth level and not much beyond. Empirical knowledge is 
deficient at practically all levels. He warns that "in 
dealing with human personalities and organizations we are 
dealing with systems in the empirical world far beyond our 
ability to formulate."^ 

One aspect of the above arrangement that is of particu 
lar relevance to this study is the increasing importance of 
information in the hierarchy. The transmission and inter- 
pretation of information become an important part of the 
systems at the third level. For these cybernetic systems, 
it, however, relates only to the difference between the 
"observed" value of the maintained variable and its "ideal" 
value. Systems at the fifth level have information recep- 
tors, but they are diffuse and incapable of much throughput 

5. Boulding, pp. 205, 207. 



20 



At the sixth level, there is the development of specialized 
information receptors leading to an enormous increase in the 
intake of information and its organization into a knowledge- 
structure or "image." This image is not a simple piling up 
or accumulation of information received but something essen- 
tially different from the information itself. It intervenes 
between a stimulus and the response and gives rise to diffi- 
culties in the prediction of the behavior of these systems. 
At the seventh -- human -- level, this image takes a self- 
reflexive quality bound up with the phenomenon of language 
and symbolism. Social organizations -- at the eighth level 
-- may be considered as a set of roles tied together with 
channels of communication. There is concern with the con- 
tent and meaning of messages, the nature and dimensions of 
value systems, the transcription of images into an histori- 
cal record, the subtle symbolizations of art, music, and 
poetry, and the complex gamut of human emotion.^ 

The Concept of Systems 

To take advantage of the interdisciplinary approach and 
isomorphisms as developed in general systems theory, it is 
necessary to understand the concept of systems. There is no 
unanimity on the definition of a system. Various writers 
have given different definitions. After considering a 
number of them, Beckett observes that although definitions 



6. Boulding, pp. 202-205. 



21 



are useful in most circumstances, they are by themselves 

7 

inadequate in this field. Hall and Fagen think that the 

concept of systems is simply not amenable to complete and 

g 

sharp description. A general idea, however, may be gained 
from a consideration of definitions formulated by various 
writers . 

Ackoff has made an attempt to organize the concepts 
and terms commonly used to talk about systems. He defines 

Q 

a system as "a set of interrelated elements." Definitions 

quite similar to this have been used by many other writers. 

A few examples of such definitions are given below. 

Beckett -- A system is a collection of inter- 
acting systems. 10 

Sollenberger -- ... an organized collection of 
parts united by regulating interact ions . H 

Johnson, Kast and Rosenzweig -- ... an organized 
or complex whole"; an assemblage or combination 
of things or parts forming a complex or unitary 
whole. 12 



7. John A. Beckett, Management Dynamics : The New 
Synthesis (New York: McGraw-Hill Book Co., 19713, p. 31. 

. 8. Hall and Fagen, p. 18. 

9. Russell L. Ackoff, "Towards a System of Systems 
Concepts," Management Science , XVII (July, 1971), p. 662. 

10. Beckett, p. 29. 

11. Harold M. Sollenberger, Major Changes Caused by 

the Implementation of a Management Information System , N.A. A. 
Research Monograph #4 (New York: National Accountants Associ- 
ation , 1968) , p. 6 . 

12. Johnson et al . , p. 367. 



22 



Many authors have taken a somewhat more limited view 

of the concept of systems. They include a statement of the 

goal or purpose to be a necessary part of the definition of 

a system. A few definitions of this type are cited below. 

Hall and Fagen -- A system is a set of objects 
together with relationships between the objects 
and between their attributes . . . has properties , 
functions or purposes distinct from its constit- 
uent objects, relationships and attributes . 13 

Anthony A complex unit formed of many often 
cTiverse parts subject to a common plan or 
serving a common purpose. 

Murdick and Ross -- ... a set of elements form- 
ing an activity or a processing procedure/scheme 
seeking a common goal or goals by operating on 
data and/or energy and/or matter in a time 
reference to yield information and/or energy 
and/or matter. 15 

Beer thinks that the fact that they are capable of 
being understood as a coherent group is precisely what dif- 
ferentiates a system from a meaningless collection or jumble 
of bits and pieces. '^^ Haberstroh considers common purpose, 



13. Hall and Fagen, p. 18. 

14. Robert N, Anthony, Planning and Control Systems: 
A Framework for Analysis (Boston: Division of Research, 
Graduate School of Business Administration, Harvard Uni- 
versity, 1965), p. 4. 

15. Robert G. Murdick and Joel E. Ross, Information 
Systems for Modern Management (Englewood Cliffs , N.J. : 
Prentice-Hall, Inc., 1971), p. 7. 

16. Stafford Beer, "What Has Cybernetics to Do with 
Operational Research?" Operational Research Quarterly , X 
(March, 1959) , p. 3. 



23 



functional unity, and high internal interdependence as the 

17 

criteria of a system. 

Systems may be categorized in many ways. The particu- 
lar classification of interest here is that of open systems 
and closed systems. Closed systems are not affected by 

their environments. Open systems have an environment con- 

1 8 

sisting of variables which affect their state. Such sys- 

terns have inputs and outputs. They exchange materials, 

19 

energy or information with their environment. Business 
organizations and their information systems, with which this 
study is concerned, may be classified as open systems. 

The characteristics of systems brought out by the above 
discussion may be summarized as follows: 

(1) Systems consist of interrelated and inter- 
acting elements or subsystems. 

(2) The elements or subsystems constitute a 
complex whole (distinct from the constit- 
uents) which tries to achieve some goal 

or purpose. . ■ 

(3) Systems (particularly open systems) have 
inputs, processes, and outputs. 

(4) The structure, inputs and outputs of 
systems may consist of mass, energy 
and/or information. 



17. Chadwick J. Haberstroh, "Organization Design and 
Systems Analysis," in Handbook of Organizations , Ed. J. G. 
March (Chicago: Rand McNally and Co., 1965), p. 1174. 

18. Ackoff, p. 663. 

19. Hall and Fagen, p. 23. 



24 



The Systems Approach 

The systems approach may be defined as a vay of looking 
at objects as systems. It has several implications: 
(1) Since a system consists of interacting elements, its 
understanding necessitates the analysis of such elements. 
This will include an understanding of the interactions among 
them, as well as their relationships with the environment 
of the system. (2) A system has properties, functions or 
purposes distinct from those of its constituents. A proper 
understanding of a system, therefore, requires an integra- 
tion or synthesis of the knowledge about its elements, and 

a study of the synergistic effects created by their simul- 

2 

taneous action. (3) A system is itself a part of a larger 
system. Hence its relationships with its sister systems 
and with the larger system should also be understood. 
(4) An understanding of a system requires the application 
of various disciplines.^'^ 

To summarize, the systems approach is an interdisci- 
plinary approach employed to analyze the elements of a sys- 
tem, to integrate this knov>rledge so as to relate it to the 
system as a unitary whole, and to understand the 



20. The first two points have been particularly empha- 
sized by R. L. Martino, Information Management : T he Dynamics 
of MIS (Wayne, Pa.: Management Development Institute , 

Divis ion of Information Industries, Inc., 1968), pp. 1,2; 

Murdick and Ross, pp. 8-9. 

21. The last two points are emphasized by Yaaqob Gold- 
schmidt, Information for Management Decisions (Ithaca: 
Cornell University Press, 19703, p. 209. 



25 



relationships of the system with its sister systems and 
with the larger system of which it makes a part. At the 
operational level, this involves an understanding of the 
system's purpose, structure, process, input, and output. 



Business Organizations from the 
Systems Point of View 

/ ■ ■■ , , ■ I , 

In terms of Boulding's hierarchy of systems, business 

2 3 

organizations can be placed at the eighth level. There- 
fore, according to him, there do not exist either adequate 
theoretical models or complete empirical knowledge about 
them. Some progress, however, has been made since Boulding 
made these observations and a systems approach is now being 
adopted for an understanding of business organizations. 

Classical organization theory consisted of an anatomy 
of the formal organization. It had four pillars: division 
of labor, scalar and functional processes (that is, vertical 
and horizontal growth), structure, and span of control. 
Neoclassical theory added a consideration of the behavior 
of individual participants and of the informal organization 



22. American Accounting Association's Committee on 
Information Systems, 1969-70, puts it in a slightly differ- 
ent way. "A particularly useful conception of the systems 
approach involves the identification of a system's environ - 
ment, goals, resources, management , and subsystems . See 

the Committee's report, "Accounting and Information Systems," 
Accounting Review, Supplement to Volume XLVI (1971), p. 297. 

23. Boulding, p. 205. ; .-^ 



26 



to the classical framework. Modern organization theory 
considers a business organization as a system of mutually 
dependent variables, but even this theory falls short of 
utilizing the systems concept fully. Though it looks at the 
organization as an integrated whole, it focuses primarily on 
the human organization. Consequently, the modern theory 
approach is somewhat different from the systems approach 
which would be concerned with all levels of the system. 

From the systems point of view, a business organization 
may be considered to have the following characteristics. 

Purpose of the Organization 

An organization is a purposeful system. There is con- 
siderable diversity of opinion amongst writers in this field 
as to what purpose an organization seeks to achieve. Some 
of them think that it pursues the common purpose (s) of its 
elements. The goals evolve through a process of bargaining 
among potential coalition members, and differences in the 

goals of individuals may cause disagreements and organiza- 

2 5 

tional conflict. Others distinguish between the goals of 
the organization and those of its elements and think that it 



24. William G. Scott, "Organization Theory: An Overview 
and an Appraisal," in Organizations: Structure and Behavior , 
Ed. Joseph A. Litterer (New York: John Wiley and Sons, 
1967) , pp. 14-15. 

25. See Ackoff, p. 669. 

Richard M. Cyert and James G. March, A Behavioral 
Theory of the Firm (Englewood Cliffs, N.J., Prentice-Hall, 



27 

2 6 

is a means of accomDlishing both. The confusion of the 

purpose of the organization is so deep-rooted that Orden 

does not consider the organization to be a system because it 

2 7 

does not have completely defined objectives. Beckett, 
however, takes a more realistic view in this matter. He 
finds that expressions of purpose that are in common circula- 
tion are of little, if any, value in themselves. He thinks 
that new insights are obviously needed and goes on to define 
purpose as the "intended intersystems patterns of relation- 
ships." It is "an expression of the will or intent of one 

system to achieve certain patterns of relationships between 

2 8 

itself and its sister systems." 

Structure of the Organization 

An organization is a combination of human interrela- 
tionship systems and nonhuman systems, the former being 

2 9 

hierarchically oriented. The hierarchical character of 

Inc. , 1963) , p. 43 ; 

Louis R. Pondy, "A Systems Theory of Organizational 
Conflict," Academy of Management Journal , IX (September, 
1966), p. 2^F: ' , 

26. See Johnson et al . , p. 371; 

Joseph A. Litterer (ed.), Organizations: Structure 
and Behavior (New York: John Wiley and Sons, 1967) , p. 5"! 

27. Alex Orden, "Man-Machine-Computer Systems," in 
Management Organization and the Computer , Eds. George P. 
Shul tz and Thomas L. Wh i s 1 e r (Chicago : Graduate School of 
Business, University of Chicago, 1960), pp. 70-71. 

28. Beckett, pp. 174, 177. 



29. Beckett, p. 197. 



28 



large organizations is almost universal. The individual 
subsystems will be given further consideration in a later 
part of this chapter. ••■ 

Input, Output and Process of the Organization 

The concept of organization is changing from one of 

31 

structure to one of process. A business organization has 

a dynamic interplay with its environment, receiving inputs 

32 

from it and delivering outputs to it. Generally, it 
utilizes and produces materials, services and information. 

i 

Component Subsystems of a 
Business Organization 

A business organization may be divided into its con- 
stituting subsystems or parts in many different ways. Hardly 
any two writers in the field of organization theory will be 
found to follow an identical approach in this regard. For 
the purposes of this study, a business organization may be 
considered to consist of the following three subsystems: 

(1) a decision making system, 



30. Herbert A. Simon, The New Science of Management 
Decision (New York: Harper and Brothers , 1960) , p. W0~. ' 

31. Stanley Young, "Organization as a Total System," 
California Management Review , X (Spring, 1968), p. 21. 

32. See Joseph A. Litterer, The Analysis of Organi - 
zations (New York: John Wiley and Sons, 1967), p. 149; 

Johnson et al . , p. 371. 



29 



(2) an information system, and 

33 

(3) an operations system. 

This classification emphasizes the necessity of func- 
tional specialization. In dividing work, it is necessary 
to determine which dimensions must be used to group and 
which to divide the work elements."^'* The essence of systems 
engineering lies in recognizing and understanding constit- 
uent specialities and allowing these to function only within 

3 Q 

the context of integrating their efforts into a whole. To 
a considerable degree organization is the work of isolating 
the specializations which are required by the total organi- 
zation and providing for them. Most commonly, the corporate 
body is made up of separate units each carrying out its own 
functions which contribute to the well-being and efficiency 
of the whole . 



33. Classifications similar to this have been used by 
several writers. For example, Martino specifies three func- 
tions: the production or work- flow, the decision network, 
and the information system. (Martino, p. 77.) Fertakis 
considers the following three sectors: management sector, 
operations sector, and controllership sector. (John P. 
Fertakis, "Toward a Systems -Oriented Concept of Controller- 
ship," Management Accounting , L (December, 1968), pp. 6-8.) 

34. Litterer, The Analysis of Organizations, pp. 203- 
204. 

r 

35. Kenyon B. DeGreene (ed.). Systems Psychology (New 
York: McGraw-Hill Book Co., 1970), p. 40. 

36. K. K. White, Understanding the Company Organization 
Chart, AM^ Research Study ff56 (New" York: American Management 
Association, 1963), pp. 24,25. 



30 



One o£ the macroscopic properties o£ systems pointed 
out by Hall and Fagen is "progressive segregation" move- 
ment of their parts from wholeness to independence. If the 
parts cease to behave as a system, this leads to decay; and 
a system with fully independent parts is considered to be a 
degenerate system. On the other hand, if the segregation 

is in the form of differentiation of functions, then it is 

37 

a creative or evolutionary and developmental process. The 
scheme of subsystems used in this study involves such a 
differentiation of functions. A brief description of these 
systems is contained in the following sections. 

The Decision Making System 

The term "decision making" as used in this study is 

synonymous with "managing." Its use is in keeping with what 

has been described as the "decision theory school" of manage- 
38 

ment. It is utilized here so as to avoid any confusion in 
the nature of the functions carried out by the system under 
consideration. Although planning and control are generally 
considered to be the basic functions of management, they do 

37. Hall and Fagen, pp. 21, 22. 

38. See liarold Koontz, "Making Sense of Management 
Theory," Harvard Business Review , Keeping Informed, XL 
(July-August, 1962} , pp. 32-34,; 

Murdick and Ross , pp . 46- 47 ; 

Simon also considers decision making as equivalent 
to management. (Simon, p. 1.) .,. ■ ., 



31 

39 

not relate to separable major categories of activities. 
They are closely intertwined and involve decision making. 

From the systems point of view a decision making system 
has the following characteristics. 

Purpose of the system . --The purpose of the decision 
making system is to choose among alternative courses of 
action in order to resolve problematic situations. The 
intention of the decision maker is to move toward some 
desired state of affairs. '^^ 

Structure of the system . --The decision making system 
consists primarily of men who may sometimes use machines or 
other aids to carry out the function. Decisions have a 
hierarchical nature and are made at various levels of the 
organization. These levels are generally described in terms 
of three categories. In Anthony's framework, they are: 
strategic planning, management control, and operational 
control . 

Process of the system . --The process of decision making 
has three phases: finding occasion to make a decision, 
finding possible courses of action, and choosing among these 



39. Anthony, pp. 10-12. 

40. Ferment A. Shull, Jr., Andre L. Delbecq, and L. 
L. Cummings, Organizational Decision Making (New York: 
McGraw-Hill Book Co., 1970), pp. 30-51. 

41. Anthony, pp. 16-18. 



32 

42 

courses of action. The concept of information is vital 
to the decision making process. In fact, these three phases 
may be restated as: the acquisition and organization of 
information about a problem situation, the processing and 
transformation of the information in such a way as to pro- 
duce a set of alternative courses of action, and the choice 

43 

of one of these courses of action. In addition to infor- 
mation, rules and procedures are required for the processing 
and transformation phase, as well as the choice phase. Such 
rules and procedures may be worked out in advance, in which 
case decision making may become a routine activity. In 
these circumstances, the process may be programmed and dele- 
gated to machines or to people in the other systems of the 
organization. There is, however, no strict dichotomy between 
programmed and nonprogrammed decisions. In fact, there is 
an infinite variety of decisions on a continuum from program- 
mable to nonprogrammable. Decisions may be considered as 
programmed to the extent that they are repetitive and rou- 
tine, and a definite procedure has been worked out for 
handling them so that they do not have to be treated de novo 
each time they occur. Decisions are nonprogrammed to the 
extent that they are novel, unstructured, and consequential. 
The making of nonprogrammed decisions requires use of 



42. Simon, p. 2. 

43. Shull et al . , p. 38. 



33 



judgment, intuition, and creativity, or rules of thumb. 
Programmed decision making does not constitute a part of the 
decision making system primarily because it does not necessi- 
tate the use of subjective knowledge or subjective judgment. 
In terms of the continuum from programmable to nonprogram- 
mable decisions, it is itself a matter of judgment as to 
what, extent decisions should be programmed and delegated to 
the other systems. The principal factors to be considered 
in this regard would be the risks involved (both in program- 
ming the decision making process, and in using judgment in 
each decision situation) and the technical capability to 
program the decision making process. 

Input of the system . -- Inputs to the decision making 
system are as follows. 

(1) Information -- This will include information 
about the problem situation, available 
alternative courses of action and their 
expected consequences, and previously laid 
out rules and procedures . 45 

(2) Subjective knowledge of the decision maker 
-- Direct observations made by the decision 

: • ; ■ maker, either currently or in his previous 
. ■ experience, and the knowledge otherwise 

■ V .■ acquired by him, may be used in making a 

decision. In fact, a decision maker's mind 
is filled with a tremendous amount ' of data 
collected over his lifetime which has a 

- ■ profound effect on his decisions. 46 



44. Simon, pp. 5-6, 8. 

45. For a further discussion of the concept of informa- 
tion, see pp. 35-40. 

46. Ernest H. Weinwurm, "Preliminaries of the Decision 
Making Process," Management International Review , VIII 
(1968/2-3), p. 115. For a d iscussion of the distinction 
between information and knowledge, see p. 40. 



34 



(3) Subjective judgment -- Use of subjective 
judgment is necessary in nonprogrammed 
decisions for which definite rules and 
procedures can not be, or have not been, 
worked out. Moreover, often the decision 
maker has to fill in information that is 
missing because it is too expensive to 
collect, it can not be obtained by any 
direct means, or because the information 
depends on events that have not yet 
occurred. 47 Subjective judgment may thus 
be regarded as essentially a substitute 
either for undefined or undefinable rules 
^and procedures, or for unavailable infor- 
mation needed in making a decision. 

Output of the system . --The output of the decision 
making system is the selection of a particular course of 
action. The selected course is then followed by the other 
systems of the organization. A decision may also be stored 
in the information system for use when similar situations 
arise in future. 

As indicated earlier, the specification of the three 

systems of the organization has been made with a view to 

functional specialization. Because the decision maker has 

to use his subjective judgment, he needs special skills and 

competence to do the job. Simon thinks that executives have 

4 8 

to be specially trained to carry out this function. For 
the purposes of this study, the making of a particular 
decision would be included in the decision making system 
only if it should require the use of subjective knowledge 



47. David R. Heise, "How Do I Know My Data? Let Me 
Count the Ways," Administrative Science Quarterly , XVII 
(March, 1972) , p. 58. 



48. Simon, p. 8. 



35 



and/or subjective judgment of the decision maker. 

The Information System 

Characteristics of the information system are as 
follows. 

Purpose of the system . --The purpose of the information 

system is to provide information to the other systems within 

the organization and to people outside of the organization. 

The importance of information to systems in general, and to 

decision making systems in particular, was indicated earlier. 

Its pervasive importance may be further emphasized by stating 

that ever since the beginning of history, information has 

49 

been considered a source of power. The concept of infor- 
mation, however, is far from clear. Beckett, after consid- 
ering a number of definitions of information and its various 
aspects, describes its nature as "still virtually incompre- 
hensible."^^ One of the reasons for the confusion is that 
the rigorous concepts developed by several disciplines in 
recent years are not identical, nor is any of them of general 
applicability. On the other hand, the older concepts which 
have a greater degree of generality do not have sufficient 
rigor to suit modern modes of thought. Some of these con- 
cepts are described below in brief. , 



49. David M. Sage, "Information Systems: A Brief Look 
into History," Datamation , XIV (November, 1968), p. 69. 

50. Beckett, p. 103. 



36 

In information theory, information is a measure of 
one's freedom of choice when one selects a message. It 
deals with the symbols of communication.^"'' This concept 
relates to information as a physical quantity and to its 
replication at a different point. The meaning of informa- 
tion is irrelevant for purposes of information theory. 

Closely related to the foregoing concept is the idea 

of reduction of uncertainty. Miller defines information as 

5 2 

"the opposite of uncertainty." This concept has received 
wide recognition in accounting literature. According to 
A Statement of Basic Accounting Theory , the utility of infor- 
mation lies in its ability to reduce uncertainty about the 
actual state of affairs of concern to the user.^^ Bedford 
and Onsi call it a process of ignorance reduction. 
Uncertainty reduction as the function of information is, 
however, not universally valid. In certain circumstances, 
information might increase rather than decrease uncertainty. 

51. Claude E. Shannon and Warren Weaver, The Mathe - 
matical Theory of Communication (Urbana, 111. : University 
of Illinois Press, 1949), p. 100. 

52. James G. Miller, "Living Systems: Basic Concepts," 
Behavioral Science . X (July, 1965), p. 194. 

53. American Accounting Association's Committee to 
Prepare a Statement of Basic Accounting Theory, A Statement 
of Basic Accounting Theory (Evanston, 111.: American 
Accounting Association, 1966), p. 8. 

54. Norton M. Bedford and Mohamed Onsi, "Measuring the 
Value of Information- -An Information Theory Approach," 
Management Services . Ill (January-February, 1966), p. 16. 



37 



This may occur when the unwarranted certainty inherent in 
a person's naive model of the environment is transformed 
into a more realistic, complex model that explicitly intro- 
duces warranted uncertainty.^^ 

• In cybernetic systems models, information is considered 
to be the feedback process, that is, the process of compar- 
ing a presently existing condition with the desired condi- 
tion.^^ This concept is useful for the limited purpose of 
exercising control within such systems. 

The legal concept of evidence has also been utilized 
in an attempt to define information. Stevens summarizes 
the meaning of information in a management context as 
follows: "Information is evidence obtained from competent 

sources and which is relevant and material for the problem 
5 7 

at hand...." This definition does not provide much help 
in understanding the nature of information, since the sub- 
stitute term "evidence" does not have a well-defined meaning 
either. 



55. Alfred Rappaport (ed.), Information for Decision 
Making: Quantitative and Behavioral Dimensions (Englewood 
Cliffs, N.J.: Prentice-Hall, Inc., 1970), p. 50. 

. 

56. Beckett, pp. 76-78. . 

57. William T. Stevens, The Development of a Multi- 
Dimensional Concept of Management Information Systems, with 
Particular Reference to the Conceptual Framework of Manage- 
ment Accounting (Gainesville, Fla. : University of Florida, 
1970) , p. 55. 



38 

At a more general level, information is considered as 

5 8 

"obtained knowledge, facts, data, or news." It can add 

to a representation of what is known, believed, or alleged 
59 

to be so. Although these various concepts of information 
may lack the degree of precision and rigor that is required 
for scientific application, they do show that there is an 
intimate relationship between information and knowledge. 

r 

This relationship will be explored further. 

A somevv'hat more realistic view of information has been 
adopted by those writers who have tried to find a referent 
for this term in the real world. Haberstroh considers a 
given piece of information as an abstraction which has as 
referent some aspect of the internal or external reality 
with which the organization is dealing. Murdick and Ross 
define information as a symbolic representation of a real 

system, ^■'^ while Fredericks finds it a symbolic representa- 

r 62 ' 

tion of a process. • ■ 

The idea of information is often combined with its 

communication to somebody and its receipt by the other. 



58. Bedford and Onsi, p. 15. 

59. Ira G. Wilson and Marthann E. Wilson, Information , 
Computers , and System Design (New York: John Wiley and 
Sons, 1967} , p. 22. 

60. Haberstroh, p. 1192. 

61. Murdick and Ross, p. 159. 

62. Ward A. Fredericks, "A Manager's Perspective of 
Management Information Systems," MSU Business Topics , XIX 
(Spring, 1971) , p. 8. 



39 



For example, Dorsey calls it '"a patterned relationship 

between events' which can be transmitted through a sequence 

of channels by a series of codifications and by which one 

type of event is substituted for another in such a way that 

6 3 

the event substituted in some sense stands for the other." 
Martino also finds implicit in the term information the con- 
cept of flow. It moves from one person to another. When 

it is absorbed, it is no longer information, but is knowl- 
64 

edge. Kostetsky thinks that information should be capable 

of being perceived into an increase in knowledge by the 

decision maker. Ewing takes the reverse route. He defines 

knowledge as piles of information reposing in the executive's 
66 

memory. 

From the foregoing discussion it appears that informa- 
tion has three essential characteristics : (1) it is a 
symbolic representation of reality, (2) it is communicated, 
and (3) it adds to knowledge. These characteristics may be 
combined in the following definition which will be used for 



63. John T. Dorsey, Jr., "A Communication Model for 
Administration," Administrative Science Quarterly , II 
(1957-58), p. 317. 

64. Martino , p. 37. 

65. Oleh Kostetsky, "Decision Making, Information 
Systems, and the Role of the Systems Analysts," Management 
Science , XIII (October, 1966), p. C-18. 

66. David W. Ewing, "The Knowledge of an Executive," 
Harvard Business Review , XLIII (March- April , 1964), p. 92. 



40 



the purposes of this study. Information is a symbolic 
representation of some real v\'orld state or event which when 
communicated to an individual adds to his knowledge. This 
definition docs not confine information to any particular 
source, use, role, or form, and hence can be utilized in any 
general context. Knowledge may be considered as a reservoir 
of images and ideas residing in a person's mind. Informa- 
tion is then one of the inflows into this reservoir. Other 

inflows will include direct observation and perceptions made 

6 7 

by the person, and his internal mental processes. 

Structure of the system . --The second characteristic of 
information systems is that they are man/machine systems. 
The extent of mechanization, however, may vary considerably 
among different organizations. It is possible to have an 
information system using very simple or few mechanical aids. 
At the other extreme, it may be largely automated using 
advanced computers and communication equipment. 

Process of the system . --The process of information sys- 
tems includes perception, recordation, storage, retrieval, 
processing, transmission, presentation, and decision making. 
It translates information from the environment and from its 
components as its input, stores this information and 



67. It is not implied here that all information or all 
knowledge is true. - , 

68. Peter A. Firmin and James J. Linn, "Information 
Systems and Managerial Accounting," Accounting Review , XLIII 
(January, 1968) , p. 76. 



41 

69 

associates it with previously stored information. Deci- 
sion making may be considered to be a controversial inclu- 
sion in the information system. It has been mentioned 
earlier, however, that programmed decision making may be 
delegated to machines or people within the other systems of 
the organization. To the extent that such delegation is 
made to the information system, the programmed decision 
making is included in this system. 

Input of the system . - -Both the input and the output of 
the information system consist of information. To make a 
distinction betvvreen the two in keeping with widespread 
practice, the input may be referred to as data, and output 
as information. Input data may be of many types: internal 
or external; quantitative or qualitative; past, present or 
projected; routine or nonroutine; and so on. 

Output of the system . -- Information is the output of the 
information system. It may be supplied to the other systems 
within the organization or to people outside of the organi- 
zation. Within the organization, the primary user of infor- 
mation is the decision making system. In keeping with the 
hierarchy of decision making, the information needs of 
management are also hierarchical. Detailed information is 

generally necessary for lower levels of management, whereas 

70 

at higher levels more summarized information is required. 

69. Sage, p. 63. 

70. Gerald E. Nichols, "On the Nature of Management 
Information," Management Accounting , L (April, 1969), p. 12. 



42 



The nature of infcrmatdon needed also differs. According 
to Anthony, information for operational control is tailor- 
made to the operation, frequently nonfinancial in nature, 
precise, and often in real time. For managerial control, 
it has to be integrated, more internal and historical, and 
more accurate. For strategic planning, information ought to 
be tailormade for the problem, and more external and predic- 
tive. For the operations system, the information required 
will generally be instructions prepared by the information 
system on the basis of relevant facts and decisions pre- 
viously made and stored therein. 

External users of information are a heterogeneous 
group, and their precise and total needs are unknown. Such 
users include present and potential investors, creditors, 
employees, stock exchanges, governmental units, customers, 

and others. Some of the users have the power to specify the 

72 

information to be submitted to them. 

Information handling requires special skill and exper- 
tise. People performing this function need an understanding 
of the information needs and data sources, facility in col- 
lecting, processing and communicating information, ability 
to select among alternative sources and techniques that may 
be used and the information that may be produced, and ability 



71. Anthony, pp. 67, 93. 

72. A Statement of Basic Accounting Theory , pp. 20-21. 



43 

to carry out the cost/benefit analysis of providing the 
information. 

The Operations System 

The purpose of the operations system is to carry out 
the physical operations necessary for the business of the 
organization. It is also a man/machine system, but the 
extent of mechanization may differ widely among the various 
organizations. In some, men may use simple or few mechani- 
cal aids, while others may be highly automated. 

The process of the operations system will depend on the 
nature of the operations to be carried out. It would encom- 
pass the acquisition of resources and their conversion or 
preparation for customer use. In manufacturing, operations 
include the activities of purchasing; materials handling; 

product fabrication and assembly; production planning and 

73 

scheduling; and process, quality, and inventory control. 

Programmed decision making delegated to the operations sys- 

74 

tern is also included in its process. 

The inputs of the system v;ould consist of materials, 
services, decisions and information. Its output would be 

73. Neil C. Churchill, John H. Kempster, and Myron 
Uretsky, Computer-Based Information Systems for Management: 
A Survey , N.A.A. Research Study (New York: National Asso- 
ciation of Accountants, 1969), p. 43. 

74. However, in the subsequent parts of this study, 
the term "programmed decision making" would generally refer 
only to what has been delegated to the information system. 



44 



materials and services. The inputs and outputs are exchanged 
for money and such exchange is also part of the operations 
system. 

The operations system involves the use of a number of 
skills and expertise, and these may be divided into various 
subsystems accordingly. Expertise in handling materials and 
machines, knowledge of various techniques used in production 
and processing, and skill in preparing documents and handling 
cash are examples of the specialized needs. 

An Overview of the Systems Characteristics 

The characteristics of the three systems just discussed 
are summarized in Table 1 on page 45. These systems are 
interrelated and interdependent in terms of their inputs 
and outputs. The overall purpose of the business organiza- 
tion is sought to be achieved by them in conjunction with 
each other. 

I 

Summary of the Chapter 

This chapter was concerned with the ideas lying behind 
the concept of information systems and with' the concept and 
importance of information in a business organization. 
General systems theory, which provides a backdrop for using 
the systems approach, makes it possible to utilize ideas 
developed in a particular discipline about a particular sys- 
tem in all other disciplines for isomorphic systems. The 



45 



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46 



systems approach is a way of looking at objects as systems, 
in terns o£ their purpose, structure, process, input and 
output. It involves both analysis and synthesis. A busi- 
ness organization may be seen as consisting of three sub- 
systems: a decision making system, an information system, 
and an operations system. The important characteristics of 
these systems were summarized in Table 1. 

Information is of vital importance for all systems. 
The concept of information is, however, not quite clear. 
For the purposes of this study, it is defined as a symbolic 
representation of some real world state or event which 
when communicated to an individual adds to his knowledge. 
Information constitutes an important part of the input to 
the decision making system of a business organization, and 
is also used by the operations system as well as by people 
outside of the organization. The purpose of the information 
system is to provide such information. Specialized skills 
are required to operate an information system. 



CHAPTER III 
ACCOUNTING AS AN INFORMATION SYSTEM 



Purpose and Organization of the Chapter 

In the last chapter the importance of the information 
function to systems in general and to business organiza- 
tions in particular was indicated. Traditionally, accoun- 
tants have carried out this function. Accounting was the 
original information system and in most organizations today 
it exists as the only such system,'^ Often it is the only 
formal information system and additional and ad hoc systems 

are created when additional information is needed for 

2 

decision making. Until the advent of management informa- 
tion systems, accounting was the only major department 
established for the sole purpose of generating information. 



1. Bruce Joplin, "Can the Accountant Manage EDP?" 
Management Accounting , XLIX (November, 1967), p. 5. 

2. Peter A. Firmin and James J. Linn, "Information 
Systems and Managerial Accounting," Accounting Review , XLIII 
(January, 1968), p. 77. 

3. H. Bruce Joplin, "The Accountant's Role in Manage- 
ment Information Systems," Journal of Accountancy , CXXI 
(March, 19 66), n. 44; '~ 

Also see William E. Swyers , "Integrated Infor- 
mation Systems and the Corporate Control lership Function," 
Management Accounting , L (October, 1968), p. 18. 



47 



48 



The purpose of this chapter is to examine whether account- 
ing is capable of serving adequately as the information 
system of a business organization in today's environment. 
An attempt will first be made to understand the purpose, 
structure, process, input, output and dynamic development 
of the accounting system. Next, the specialized skill and 
expertise acquired by accountants to carry out their v;ork 
will be analyzed. Limitations of accounting in its role as 
the information system of a business organization will be 
noted and the basic reasons for this will be analyzed. 
Finally, suggestions made in the literature for improvements 
in accounting will be evaluated in order to assess whether 
they would enable accounting to serve adequately as the 
information system of a business organization in a modern 
environment. 

^ Accounting from the 
Systems Point of View 

In business organizations, accounting is generally con- 
sidered as a specialized function carried out by members of 
a specialized discipline. It has its own structure and pro- 
cess and may be regarded as one of the subsystems of the 
organization. The systems approach may be adopted, there- 
fore, to better understand the nature of accounting. 



49 



Purpose of Accounting 

Two methods may be used to determine the purpose of 
accounting. First, generalizations made in the literature 
about the nature and functions of accounting may be examined 
to find out what is considered to be its purpose. Second, 
functions actually carried out by accounting may be ana- 
lyzed to determine the same.'^ 

One of the first serious attempts to make an organized 
generalization of the practices recognized as desirable by 
leaders in the practicing area of accountancy was made in 
the 1936 Statement of the American Accounting Association. 
In this Statement, accounting was described as a process of 
"the allocation of historical costs and revenues to the 
current and succeeding fiscal periods."^ A rationale of 
these practices was given in Paton and Littleton's monograph 
in 1940. This monograph laid doun certain standards which, 
among other things, represented an integrated conception of 
the function of accounting "as a means of expressing the 
financial facts of business in a significant manner." These 
standards rested upon assumptions specified by the authors, 



4. The discussion that follows does not exhaustively 
cover everything which has been said in the literature about 
these matters, but is aimed at pointing out the principal 
streams of thought. 

5. American Accounting Association's Executive Com- 
mittee, "A Tentative Statement of Accounting Principles, 
Underlying Cornorate Financial Statements," issued in June, 
1936, in Accounting and Reporting Standards for Corporate 
Financial Statements and Preceding Statements and Supple - 
meivts (Iowa City: American Accounting Association) , p. 61 . 



50 

which were supposed to be "known and accepted."^ They were 

based upon the specific tasks carried out by accountants. 

The 1941 Statement of AAA made a fundamental change in this 

situation and specified the purpose of periodic financial 

statements to be "to furnish information that is necessary 

7 

for the formulation of dependable judgments." The 1948 

Statement made only a slight change, and said that the 

financial statements "must supply dependable information for 

g 

the formulation of judgments." These two Statements appear 
to have been ahead of their times in referring to the formu- 
lation of judgments on the basis of accounting information. 
The 1957 Statement reverted to some extent and specified 
that the "primary function of accounting is to accumulate 

and communicate information essential to an understanding of 

9 

the activities of an enterprise." However, A Statement of 
Basic Accounting Theory (hereafter called ASOBAT) brought 
back ideas of the 1941 and 1948 Statements in a more refined 



6. William A. Paton and A. C. Littleton, An Introduc - 
tion to Corporate Accounting Standards (Chicago: American 
Accounting Association, 1940) , pp. T] 7 . 

7. American Accounting Association's Executive Com- 
mittee, "Accounting Principles Underlying Corporate Finan- 
cial Statements," issued in June, 1941, in Accounting and 
Reporting Standards for Corporate Financial Statements and 
Preceding Statements and Supplements , p'. ST] [Emphas is 
removed. ] 

8. "Accounting Concepts and Standards Underlying Cor- 
porate Financial Statements," 1948 Revision, ibid . , p. 18. 

9. "Accounting and Reporting Standards for Corporate 
Financial Statements," 1957 Revision, ibid . , p. 1. 



51 



way and defined accounting as "the process of identifying, 

measuring, and communicating economic information to permit 

informed judgments and decisions by users of the informa- 
tion."10 

Progress in the same direction was made also be accoun- 
tants in public practice. The Accounting Terminology Bulle- 
tins of the American Institute of Accountants defined 
accounting as "the art of recording, classifying, and sum- 
marizing in a significant manner and in terms of money, 
transactions and events which are, in part at least, of a 
financial character, and interpreting the results thereof . "■^■'' 
This definition emphasized the sources of accounting infor- 
mation and the specific tasks carried out by accountants. 
It was later superseded by Statement #4 of the Accounting 
Principles Board which describes accounting with reference 
to its function: "to provide quantitative information, 
primarily financial in nature, about economic entities that 
is intended to be useful in making economic decisions --in 
making reasoned choices among alternative courses of action." 



10. American Accounting Association's Committee to Pre- 
pare A Statement of Basic Accounting Theory, A Statement of 
Basic Accounting Theory (Evans ton. 111. : American Accounting 
Association , 1966) , p. 1 . 

11. Committee on Terminology, Accounting Terminology 
Bulletin #1; Review and Resume (New York: American Institute 
of Certified Public Accountants, 1953), p. 9. 

12. Accounting Principles Board Statement #4, Basic 
Concepts and Accounting Principles Underlying Financial 
Statements of Business Enterprises (New York: American Insti- 
tute of Certified Public Accountants, 1970), paragraph 40. 



52 



It v;ould appear from the foregoing then that the pur- 
pose of accounting is to provide reliable financial informa- 
tion for decision making. The scope of the functions 
actually carried out by accountants, however, seems to be 
much broader. Services and functions traditionally per- 
formed by accountants are summarized below. ''"^ 

1. Provi,sion of information 

A. To people outside the organization, such as 

(1) financial statements to stockholders and 
others 

(2) reports filed v/ith the Securities and 
Exchange, Commission 

(3) information to independent auditors 

(4) information to lenders, bondholders and 
financial institutions 



13. This summary was prepared after taking into con- 
sideration the statements contained in a number of writings, 
including: 

- 1 > f .i , • .... 

Percival F. Brundage, "Milestones on the Path of 
Accounting," Harvard Business Review , XXIX (July, 1951), 
pp. 71-81; 

Leonard A. Robinson and Milton J. Alexander, "Are 
Accountants Adjusting to Change?" Management Accounting , 
LIII (November, 1971), p. 11; " 

Reg S. Gynther, "The Management Accountant of the 
Future," Accountants' Journal (New Zealand), LI (August, 
1972), pp. 2-11; 

William B. Barrett, "A Functional Approach to 
Accounting," Accounting Review , XLIII (January, 1968), 
pp. 105-112; 

Robert Beyer, "Management Information Systems: l\Tio' 
Be in Charge?" Management Accounting , XLVIII (June, 1967), 
pp. 4-5; 

Arthur B. Toan, Jr., "Is Accounting Geared to 
Today's Needs?" Management Adviser, VIII (November-December, 
1971) , pp. 17-18. 



53 



(5) information provided to various government 
agencies for specific purposes 

(6) information to potential investors 

B. To people within the organization, such as 

(1) costs of products 

(2) information for planning and control, 
including budgets, standards, and analysis 
of variances 

(3) price and cost estimates 

(4) projected economic data 

(5) analysis, interpretation and evaluation 
of information 

2. Institution and enforcement of internal control 

3. Development of systems - > 

4. Financial custodianship and management 

'i 

5. Settlement of tax liability 

6. Negotiations about cost plus contracts 

Functions contained in the foregoing list have evolved 
slowly over the years. This evolution has come about due 
primarily to exogenous factors, some of which are listed 
below. " ^ ' 

(1) Mergers and combinations of businesses 

(2) Income tax legislation 

(3) Securities Act and Securities Exchange Act 

(4) Impact of the two world wars on business, 
such as granting of cost plus contracts 

14. See Brundage, pp. 79-80; 

Robinson and Alexander, pp. 12-14. 



54 



(5) Developments in the management science 
techniques and electronic data processing 
equipment 

(6) Changes in general price level and their 
impact on business, such as wage and price 
controls 

The noninformational functions carried out by accoun- 
tants are intimately related to their information-provision 
activities. Institution of internal control and systems 
development form the basis of the reliability of data col- 
lected by the accounting system. '''^ The accountant's primary 
interest in the financial aspects of states and events makes 
him suitable to take the responsibility of financial cus- 
todianship and management . "'^^ Similarly, compliance with 
taxation laws, Securities Act and the Securities Exchange 
Act, as also negotiations about the cost plus contracts, 
require primarily the submission of information to appropri- 
ate authorities. Such information is developed by the 
accountant, and therefore he is found suitable to carry out 
these functions also. Thus it seems that even though the 
accountant does carry out several noninformational functions, 
these may not be completely detached from his informational 
responsibilities. 

In the light of the foregoing, the purpose of the 
accounting system appears to be the development and 



15. Further consideration will be given to the relia- 
bility of data in the later parts of this chapter. 

16. Further consideration will be given to the accoun- 
tant's interest in the financial aspects in the later parts 
of this chapter. 



55 



communication of reliable, financial information to the 
decision making system of the organization and to people out- 
side of the organization. Certain noninformational functions 
which have an intimate relationship to the development and 
communication of such information are also performed by the 
accounting system. 

Structure, of Accounting 

The structure of accounting consists of men, books, and 
machines. The extent of mechanization may differ widely in 
various organizations, varying from the use of very simple 
mechanical devices to the utilization of advanced data 
processing equipment. The machines are, however, used 
mainly to help men in discharging their functions with 
greater speed, accuracy and efficiency. 

Process of Accounting 

Accounting collects data and converts the same into 
information which is communicated to users. A large number 
of accounting techniques and procedures have been developed 
which are often categorized into two parts: financial 
accounting and management accounting. Apart from the use 
of these techniques and procedures, the successful opera- 
tion of the accounting system depends upon the general 
attitude which accountants have developed toward their work 
and utilization of professional judgment by them where 
necessary. 



56 



Financial accounting and management accounting . - - ■ 

Financial accounting refers to the process of reporting 

financial information about the organization to the outside 

world while the objective of management accounting is to 

1 7 

provide information useful to management. The external 
reporting is mainly in the form of financial statements, 
and the techniques used for their preparation include gener- 
ally accepted accounting principles. These principles are 
formalized in the opinions of the Accounting Principles 
Board of the American Institute of Certified Public Accoun- 
tants (hereafter called APB) . There has been widespread 
dissatisfaction with these principles and the Institute is 
in the process of replacing the APB by the Financial Account- 
ing Standards Board to help develop financial accounting in 

1 8 

keeping with today's environment. A number of suggestions 
are found in the accounting literature for improvements in 
external reports, but insufficient attention seems to have 
been given to them in practice. For example, in spite of 
APB's recommendation to prepare price level adjusted finan- 
cial statements, hardly any business organization prepares 

17. Robert N. Anthony, Planning and Control Systems: 
A Framework for Analysis (Boston : Division of Research, 
Graduate School of Business Administration, Harvard Uni- 
versity, 1965), pp. 100-101. 

18. "AICPA Adopts IvTieat Report on Accounting Standards 
Board," Journal of Accountancy , CXXVII (June, 1972), p. 10. 



57 

19 

such statements. The situation of management accounting 
seems to be entirely different in this regard. A large 
number of accounting techniques developed in this area have 
helped convert the erstwhile "cost accounting" into the 
modern concept of "management accounting." Such techniques 
include standard and direct costing, variance analysis using 
statistical methods, flexible and probabilistic budgeting, 
use of decision theory techniques, and adoption of the 
learning curve phenomenon. The distinction between finan- 
cial and management accounting seems to be widening gradu- 
ally. As indicated earlier, the Accounting Principles Board 
is being replaced by the Financial Accounting Standards 
Board. The National Association of Accountants has recently 
established the Institute of Management Accounting to grant 
Certificates in Management Accounting. 

General attitude of account ants .- -Despite the differ- 
ences between financial accounting and management account- 
ing, accountants have developed a distinct attitude toward 
their work which helps them in the performance of their 
functions. The important characteristics of this attitude 
are mentioned below. 



19. The recommendation was made in APB Statement #3, 
Financial Statements Restated for General Price-Level 
Changes (New York: Ai^ierican Institute o± Certified Public 
Accountants , 1969), paragraph 25. But according to the 
1970, 1971 and 1972 editions of the Accounting Trends and 
Techniques , none of the 600 companies included in each 
year's survey presented such statements. (See page 42 of 
the 1970 edition, page 49 of the 1971 edition, and page 66 
of the 1972 edition.) 



58 



(1) Looking at the organization as a whole -- The 

2 

accounting system is a model of the organization, and 
accountants take a wholistic view of the same. 

(2) Seeking financial aspects of states and events -- 

2 1 

Accounting is financially oriented. Its main task is to 

translate all the variables into financial terms. This 

aspect of the accountant's general approach is important 

because money is the only common denominator for bringing 

together the heterogeneous elements of outputs and inputs 

2 

that are of concern to management. 

(3) Presenting only reliable information -- Reliability 
of information may be defined as the certainty created in 
the mind of the user that the information corresponds with 

the real world state or event it seeks to represent. It 

■ . . . .. . 



20. Robert R. Sterling, "On Theory Construction and 
Verification," Accounting Review , XLV (July, 1970), p. 450. 

21. Joplin (1967) , p. 5. 

22. Gynther, p. 7. 

23. Anthony, p. 41. 

24. This definition is compatible with Chambers' state- 
ment: "The reliability of processed information subsists 

in the actor's belief in its correspondence...." See 
Raymond J. Chambers, Accounting, Evaluation and Economic 
Behavior (Englewood Cliffs, N.J. : Prentice-Hall, Inc. , 
1966) , p. 165 [Emphasis removed ] ; 

Also with the definition given by Snavely: "Reli- 
ability is that criterion which recognizes that for informa- 
tion to be useful, a user must be able to depend on it as 
a representation of \vfhat it purports to be." See Howard J. 
Snavely, "Accounting Information Criteria," Accounting 
Review , XLII (April, 1967), p. 228. ^ 



59 



has been one of the cornerstones of accounting. APB 

Statement #4 considers the provision of reliable financial 

information as the first general objective of financial 

accounting. Achievement of the six qualitative objectives 

2 6 

specified by it enhances such reliability. The standard 

of verif lability laid down by ASOBAT is a necessary attri- 

2 7 

bute of accounting information to make it reliable. 

2 8 

(4) Disinterestedness in the information supplied 

The functions of accounting are neither in operations nor 
29 

m management. For the most part, the accountant reports 
on the operations of the business, which reflect the conse- 
quences of the decisions made by management, and not on his 
own performance. He attempts to preserve a disinterestedness 
in the information he provides. The qualitative objective 



25. Sometimes, the term "objectivity" is used in account- 
ing literature in the same sense as "reliability." See 
Snavely, p. 228. 

I 

26. APB Statement #4, paragraphs 77, 107. 

27. ASOBAT, p. 10. 

28. The term "disinterestedness" is being used here in 
its restricted sense of objectivity, freedom from personal 
interests, and impartiality. It should be distinguished 
from "uninterestedness , " which indicates the fact of lack 

of interest. See Webster's Third New International Diction - 
ary , Phillip B. Gove, Editor-in-Chief (Springfield, Mass.: 
G. and C. Merriam Company, 1968), p. 1151 under "indif- 
ferent . " 

29. John P. Fertakis , "Toward a Systems - Oriented Con- 
cept of Controllership," Management Accounting, L (December, 
1968), p. 6. ^ 



60 



of neutrality in APB Statement #4 and the standard of freedom 
from bias in ASOBAT are reflections of this attitude. The 
accountant is, however, often accused of concentrating too 
much on noninf ormational functions such as the compliance 
with the taxation laws and on the formal presentation of 
information to outsiders. 

Professional judgment of accountants .- -The functions of 
accountants are not purely mechanistic. They require fre- 
quent use of judgment. Some of the areas necessitating such 
use are as follows. 

(1) Input to the accounting system -- It is necessary 
to determine the level of reliability of the input of the 
system. For some of the routine and regular inputs, stan- 
dard procedures may be laid down. For other inputs such 
procedures may not be feasible. Accountants have to use 
their professional judgment in establishing the standard 
procedures as well as in considering nonroutine items for 
acceptance. 

(2) Output of the accounting system -- Accounting 
systems are not often set up after a formal analysis of the 



30. APB Statement #4, paragraph 91; 
ASOBAT, p. 11. 

31. For example, see William H. Lundquist, "Accountants 
Face New Challenges," Management Accounting , XLVIII (March 
1967) , p. 3 ; 

Bertram A. Colbert, "Pathways to Profit: The 
Management Information System," Management Services, IV 
(September-October, 1967), p. 19~ ' ~ 



61 



needs of the users of information. Accountants, therefore, 
have to use their judgment in deciding what information they 
should provide to the decision makers and other users of 
information. Judgment exercised is generally based upon 
their familiarity with the operations of the organization, 
decisions to be made, and the information required for mak- 
ing them. 

(3) Techniques and procedures to be used -- Alternative 
techniques are available for developing many of the items of 
accounting information. Accountants need to decide which 
particular procedure will be the most appropriate under a 
particular set of circumstances. The expected impact on the 
finances and the tax situation of the organization are among 
the matters taken into consideration by accountants in making 
such decisions. 

Input of Accounting 

In keeping with the purpose and process of accounting, 
its input is limited to reliable data relating primarily to 
the financial aspects of states and events that meet appro- 
priate qualitative standards. There are gradations in the 
reliability standard. The accountant has to ensure that the 
level of reliability of the various items of data used in 
producing some information is compatible with the level of 
reliability required for such information. Highest reli- ' 
ability can be achieved for historical internal or inter- 
active data based upon completed transactions and events. 



62 



Projected data based upon expected external events will 
have the least reliability. 

Data received by the accounting system consist of both 
quantitative and qualitative elements. Qualitative aspects 
are generally used for some limited purposes, such as clas- 
sifying and arranging data in accordance with the nature of 
the state or event represented, and explaining, qualifying 
or supplementing quantitative information. 

Output of Accounting 

The output of accounting is financial information. It 
is communicated to the decision making system within the 
organization and to people outside the organization. Types 
of information supplied by the accounting system have been 
illustrated in the section relating to the purpose of 
accounting. The information may have varying degrees of 
reliability as may be appropriate for different purposes. 

Information supplied by the accounting system has to 
meet certain qualitative standards. There is, however, no 
unanimity of opinion among the writers in this area as to 
what these standards are. ASOBAT considers relevance, 
verifiability , freedom from bias, and quantif lability as 
the basic standards which constitute the usefulness of 
accounting information.^^ APB Statement #4 lays down the 
following qualitative objectives for financial accounting: 



32. ASOBAT, pp. 7, 3. 



63 



relevance, understandab il ity , verifiability , neutrality, 
timeliness, comparability, and completeness.^"^ Snavely 
considers relevance, reliability, understandability , sig- 
nificance, sufficiency, and practicality as the necessary 
criteria, and the information meeting these would have use- 
fulness."^^ While both ASOBAT and APB Statement #4 admit 
the possibility of trade-off among the standards or objec- 
tives laid down by them,^^ Snavely rules out any such possi- 
bility among his criteria. 

Accountants also concern themselves with the authority 
of the recipients of the information. Only authorized 
information is provided to the persons authorized to receive 
the same. This, criterion is applied both to external 
reporting and, perhaps in a lesser degree, to internal 
reporting. 

Though accounting provides primarily financial (or 
monetary) information, it is sometimes supported by other 



33. APB Statement #4, paragraphs 88-94. 

34. Snavely, pp. 227-231. Usefulness is his Level I 
criterion, while the others are Level II criteria. 

35. ASOBAT, p. 10 ; 

APB Statement #4, paragraph 111. 

36. Snavely, p. 232. This applies to his Level II 
criteria. 

37. C_f. Goldberg: "... the purpose of accounting 
reports, it would seem, is to inform persons entitl ed to 
information." Louis Goldberg, An Inquiry Into the .Ma ture 
of Accounting (American Accounting Association, 19651 

p. 55. [Emphasis added.] ' 



64 



types of information also. For example, the dollar amount 
of sales may be accompanied by the quantity of the goods 
sold. This is particularly the case in internal reporting. 
However, the emphasis of accounting remains upon financial 
aspects of states and ev^ents. 

Dynamic Development of Accou nting 

Accounting is a time varying system. Its evolution has 
been directed to providing useful information to users. "^^ 
The nature of information considered to be useful may change 
with time, requiring variations in the accounting system. 
To accomplish this, accountants try to keep in touch with 
the changes in the information needs of users. Being in 
close touch with the day to day operations of the business, 
they are more successful in this task with respect to the 
decision making system of the organization. In order to 
meet the changing information needs, modifications may be 
made in the standards for input acceptance or output report- 
ing, or in the processing subsystem of the accounting system. 

A Model of Accounting as an Information System 

So far as its informational functions are concerned, 
accounting may be represented by the model shown in Figure 1 
on page 65. 



38. APB Statement #4, paragraph 209. 




del of the 



accounting 



information system. 



66 



Data are accepted into the accounting system if they 
are found to meet with standards of input acceptance. They 
are stored, retrieved and processed according to the appli- 
cable techniques of accounting. Information that meets with 
the stipulated standards is reported to different users. 
Users get nonaccounting information by direct observation or 
through other channels, and also contribute to the data in- 
puts of the accounting system. 

Specialized Skill and Expertise •■' 

~" of Accountants '. [ ' 

The performance of accounting functions requires the 
use of specialized skills and expertise such as the follow- 
ing. 

(1) Acquisition of accounting techniques, some 
of which were mentioned earlier. 

(2) Development of an attitude appropriate for 
accountants, the characteristics of which 
were listed earlier. 

(3) Development of professional judgment for 
use in various areas, some of which were 
mentioned earlier. 

(4) Expertise in the noninf ormational functions 
that an accountant has to carry out, such 
as in taxation laws. 



67 

Limitations of Accounting 

Although accounting has been the principal formal 
information system of business organizations for a long 
time, it has been found deficient in the modern environment. 
This is because accounting is unable to develop and provide 
all types of information needed by users. A brief look at 
the information needs of the various categories of users 
of information will be helpful in determining the limita- 
tions of accounting. 

Information Needs of the Decision Making System 

Accounting is able to supply only a part of the infor- 
mation needed by management. The total information needs of 
management may be analyzed in many ways. Nichols has used 
the following comprehensive classification. 

1. Internal information ' I ' 

(a) Quantified -- (i) financial, (ii) nonfinancial 

(b) Nonquantif ied 

2. Extrinsic information 

(a) Management intelligence -- (i) competitive 
information, (ii) general information 

(b) Interaction information -- (i) latent, 
(ii) consummated 



39. Gerald E. Nichols, "Accounting and the Total Infor- 
mation System," Management Accounting , LII (March, 1971), 
p. 30 . 



68 



In terms of this classification, accounting generally pro- 
vides financial internal information and consummated inter- 
action information. For other types of information, deci- 
sion makers must depend upon other sources, such as direct 
observation, subjective knowledge, or other channels of 
obtaining information. 

Information Needs of the Operations System 

Accounting does not aim at providing information for 
the operations system of the organization. The information 
needed by that system would generally revolve around deci- 
sions previously made by the decision making system and a 
combination of data and such decisions. It would often be 
of a nonfinancial nature and be required in real time.^*^ 
Logistics , which relate to the physical flow of goods includ- 
ing procurement, production and distribution, form an impor- 
tant part of the information needs of the operations system. 
The logistics information system is complex and involves the 
use of many operations research and scientific management 
techniques which are not usually adopted by accounting. 

Information Needs of External Users 

Accounting for external users has received more atten- 
tion in the literature than has accounting for internal 
management. Such users are a heterogeneous group with 



40. Cf. Anthony, p. 78. 



69 



widely varying interests. "The facts that different deci- 
sions and different decision makers are involved and that 
many unverifiable and unquantif iable types of information 
are probably significant to them indicate that accounting 
can supply only some of the information needed by external 
users. ^ - 

Though attempts have been made to identify the impor- 
tant external users and their information needs there is 
only a broad and imprecise understanding of such needs. 
However, "the accountant is accustomed to situations in 
which no specific requests for information are made and in 
which responsibility for generalizations about the more 
important needs of users must be assumed jointly by the 
accountant and the entity whose activities are being 
reported upon."'*^ 

Basic Reasons for the Limitations of Accounting 

The following appear to be the basic reasons why account- 
ing is unable to provide all types of information needed by 
the various users. 

(1) The scope of accounting is generally limited to 
reliable financial information which also meets certain 

41. ASOBAT, p. 20. 

42. For example, see APB Statement #4, paragraphs 44-48; 
ASOBAT, pp. 19-23. 

43. ASOBAT, p. 22. 



70 



qualitative standards. 

(2) Total information needs of the various users are 
not precisely known. 

" (3) Techniques of scientific management (such as oper- 
ations research) have not been integrated into the account- 
ing system. Many of these techniques, which have been 
developed in recent years, are complex -- sometimes so 
complex as to require the use of the computer -- and require 
information which is not developed by the accountant. 

Improvements in Accounting 
Suggested in Literature 

A number of suggestions have been made in the litera- 
ture to improve accounting. In most cases, individual pro- 
posals relate to particular techniques or procedural details 
which are of no direct interest in this study. However, the 
implementation of the various recommendations would make some 
basic changes in the structure and process of accounting. 
The expected impact of the suggested changes is briefly 
described and evaluated below. 



44. Suggestions found in the literature have been pre- 
sented in summary form in the following writings: 

APB Statement #4, paragraphs 214-219 (suggestions 
relating to improvements in financial accounting) ; American 
Accounting Association's Committee on Managerial Accounting, 
"Report of the 1969-70, 1970-71 Committee on Managerial 
Accounting," Accounting Review, Supplement to Volume XLVII 
(1972), pp. 322-329 (suggestions relating to improvements 
in management accounting). 



71 



Development of Decision Models by Accounting 

Researchers in the field of accounting are preoccupied 
with the idea that accounting information must be kept with 
the requirements of the users. The informational needs, it 
is assumed, depend upon the decision models used by the 
recipients of information. In order to improve accounting 
it is necessary to be familiar with these models. But often 
these models are not known with any precision. To cope with 
this difficulty, various writers either vaguely assume the 
existence of some decision models, or develop such models on 
a priori grounds, and recommend that accounting should 
develop and communicate information in accordance therewith. 
An implication of these recommendations seems to be that 
accounting itself should lay down normative decision models 
which must be used by the recipients of accounting informa- 
tion. 

Such proposals abound both in the areas of financial 
accounting and management accounting. Proposals contemplat- 
ing sweeping changes in the financial accounting structure 
or the contents of financial statements and those contem- 
plating change in the presentation of financial accounting 
information"^^ are, in most cases, based on vague assumptions 

45. See APB Statement #4, paragraphs 216-217. These 
proposals would, for example, permit accrual of increases 
in value of resources during production; substitute current 
replacement prices, current selling prices, or discounted 
present value concepts for acquisition prices as the basis 
of measurement; recognize changes in the general level of 
prices; and incorporate budgets as part of the basic finan- 
cial statements. They would also require the use of ratios 



72 



of decision models used by external users of accounting 
information. Examples of decision models developed by- 
accountants in this field are the normative investment 
valuation model and the dividend prediction model created 
by the Committee on External Reporting. In the area of 
management accounting, the Committee on Managerial Account- 
ing has found that accountants rely upon a priori reasoning 
to identify the types of models decision makers should use 
in various decision situations. Furthermore, various 
accountants have proposed that specific decisions concern- 
ing capital acquisition, inventories, and output mixes 
serve as individual accounting entities. 



(instead of money amounts), graphs, charts, and other 
visual aids. 

46. American Accounting Association's Committee on 
External Reporting, "An Evaluation of External Reporting 
Practices: A Report of the 1966-68 Committee on External 
Reporting," Accounting Review, Supplement to Volume XLIV 
(1969), pp. 80-88. The Committee has made specific sugges- 
tions about the content and format of financial statements 
which would supply the information necessary for the use 

of its models. See pp. 119-122. 

47. Committee on Managerial Accounting, pp. 323, 325. 
The implementation of the latter proposals would necessi- 
tate additional classifications of performance statistics. 
The advantage of such a system would be that control infor- 
mation would be consistent with the planning information, 
and the significance of any deviation between forecasted 
and actual values could be assessed in terms of the struc- 
ture of the model. 



73 



Adoption of New Techniques and Procedures 

Various writers recognize that in order to develop and 
communicate the information required by decision makers, it 
would be necessary for accounting to adopt appropriate 
techniques and procedures , some of which have not been 
traditionally used by accountants. 

In financial accounting, many of the proposals contem- 
plate changes within the basic historical-cost-based 

accounting which would broaden the measurement and recog- 

• . 48 
nition criteria. In management accounting, a consider- 
able body of literature has grown which contains proposals 
relating to the control and evaluation of performance. 
Such research is concerned with the various aspects of 
standards setting and variance analysis, and utilizes ideas 
from several disciplines, such as the behavioral sciences, 
information theory, and statistical decision theory.'*^ 

Changes in the Standard of Reliability 

An implementation of many of the suggestions made in 
the literature would result in a lowering of the level of 
reliability required for accounting information, particularly 
the information communicated to external users. Examples of 
such information are: valuation of items at their 



48. _ APB Statement #4, paragraph 215. This would result 
in the inclusion of many new items in the financial state- 
ments, such as contracts, commitments and leases. 

49. Committee on Managerial Accounting, pp. 326-329. 



74 



discounted present values (as opposed to historical costs) 
and projected information about the future (as opposed to 
merely historical information) . Other recommendations 
relate to the refinement of the concept of reliability by 
the adoption of nev; techniques , such as the use of interval 
estimates and preparation of probabilistic budgets. 

An Evaluation of the Proposals „ 

Even if all or most of the proposals relating to im- 
provements in financial accounting and management account- 
ing are implemented, accounting can not be expected to 
serve adequately as the sole, or major, information system 
of a business organization. The reasons for this situation 
are as follows. 

(1) Accounting will continue to be concerned primarily 
with financial information. Most of the nonfinancial infor- 
mation required by internal and external users will need to 
be obtained through other sources or channels. 

(2) Accounting will continue to supply information to 
the decision making system and to people outside the organi- 
zation. The informational needs of the operations system 
of the organization will not be supplied by accounting. 

(3) Accounting will provide information relevant to 
decision models specified by itself. Insofar as such models 
represent the structured decision making process actually 
followed by the users, such a development would make account- 
ing information more useful. But if accountants insist on 



75 

laying down normative decision models for unstructured deci- 
sions, they may be considered to be v\'orking beyond the scope 
of their specialized skills. - > 

(4) When the scope of the accounting function becomes 
considerably broader by the implementation of some or all 
of the various recommendations, it seems unlikely that it 
will continue to exist as an independent system or as an 
independent discipline. As anticipated in A Statement of 
Basic Accounting Theory , it may well merge with other 
separate disciplines, and a new "information profession" may 
evolve. The concern of the profession of accounting will 
then be as to how the accountant can maintain his "present 
relative position. "^'^ 

Summary of the Chapter 

Traditionally, accounting has been the principal, or 
only, formal information system of business organizations. 
Its purpose is the development and communication of reliable 
financial information to the decision making system of the 
business organization and to people outside the organization, 
and to carry out other functions which have a close rela- 
tionship to such information. The structure of the account- 
ing system consists of men, books and machines where 
machines are used primarily to help men in the performance 



50. ASOBAT, p. 63. 



76 



of their tasks. Its process includes the techniques of 
financial and management accounting which are used in con- 
junction v^ith the general attitude of accountants toward 
their work and their professional judgment. The important 
characteristics of this attitude are: looking at the organ- 
ization as a whole; seeking the financial aspects of states 
and events; presenting only reliable information; and pre- 
serving a disinterestedness in the information supplied. 
Input and output of the accounting system consist of finan- 
cial data and information of varying degrees of reliability 
which also meet with certain qualitative standards. The 
information developed is communicated only to authorized 
users. Accountants also try to keep in touch with changes 
in the information needs of users and make necessary changes 
in the system. Users, however, have to get some of their 
information either by direct observation or through other 
channels. 

Specialized skill and expertise of accountants include 
accounting techniques, an appropriate attitude toward work, 
professional judgment, and a facility in noninf ormational 
functions. 

The accounting system is generally unable to supply all 
types of information needed by users. The basic reasons for 
this situation appear to be its concern with the development 
of reliable financial information, lack of knowledge regard- 
ing the total information needs of users, and a practical 



77 



inability to become versatile in all the techniques of 
scientific management. An examination of the various 
suggestions made in the literature relating to improvements 
in accounting shows that their acceptance and implementa- 
tion in practice would considerably broaden the scope of 
accounting, and accounting would need to utilize many new 
techniques to develop information for meeting the needs in 
accordance with the normative decision models assumed to be 
used by decision makers (both internal and external) on 
a priori basis. However, accounting would still be con- 
cerned primarily with financial information. It would be 
unable to use sophisticated techniques for problem solving 
and programmed decision making or to supply information for 
the operations system of the organization. Its ability to 
specify decision models with respect to unstructured deci- 
sions to be employed by users is also suspect. In view of 
these observations it seems unlikely that accounting would 
be able to serve adequately as the sole, or major, informa- 
tion system of business organizations in the modern environ- 
ment . 



CHAPTER IV 
MANAGEMENT INFORMATION SYSTEMS 



MIS -- a system concept put forth as the major 
thrust of a joint conspiracy of DP professionals 
and consultants, formulated and used to increase 
their own salaries, to confuse what otherwise 
would be a record of minimal accomplishment, and 
to retain their position in the organization by 
using the MIS effort as a means of retaining 
their staffs until the next generation of com- 
puters is released. 

Clarke Newlin. 



Purpose and Organization \ 
of the Chapter 

The concept and functions of accounting were discussed 
in the last chapter and it was found that accounting did 
not provide all types of information required by different 
users because of certain basic deficiencies and limitations. 
An alternative to accounting which has evolved during the 
last two decades or so is that of management information 
systems (hereafter referred to as MIS). The purpose of this 
chapter is to study the meaning and functions of MIS --to 
determine to what extent they are capable of fulfilling the 

1. Clarke R. Newlin, "The Changing World of the Data 
Processing Administrator," Data Management , X (February, 



78 



79 



informational needs of the decision making and operations 
systems of business organizations and of external users. 

There is a wide difference between the theoretical con- 
cepts of MIS put forward in the literature and such systems 
under actual operation. In order to be able to evaluate 
them adequately, an operational definition of MIS will 
first be developed in this chapter. An attempt will then 
be made to understand the purpose, structure, process, 
input, output and dynamic development of MIS. Next, the 
specialized skill and expertise required to operate such 
systems will be mentioned. Limitations and deficiencies of 
MIS, as indicated in various empirical and other studies 
reported in the literature, will then be noted, and the 
basic reasons of their occurrence will be analyzed. 
Finally, suggestions made in the literature for improvements 
in MIS will be studied and evaluated. 

I 

t 

The Concept of MIS 

A Brief Historical Background 

Information systems have been used by business organi- 
zations ever since the beginning of history. With the pas- 
sage of time, and in keeping with the increasing complexity 
of business, they have also become more and more complex. 

2. David M. Sage, "Information Systems: A Brief Look 
Into History," Datamation , XIV (November, 1968), p. 64. 



80 



For a very long time information processing was done manu- 
ally. With the development of appropriate technology, the 
next stage was that of machine- assisted manual processing, 
followed in turn by electromechanical punch card systems, 

■7 

and most recently by the use of the computer. 

The term "management information system" originated in 
the late 1950s or early 1960s. ^ It was meant to emphasize 
the importance and interrelationships of information and 
electronic data processing (hereafter referred to as EDP) . 
The concept of MIS has kept changing with the developments in 
EDP. These changes reflect both the tremendous increase in 
the capabilities of the EDP equipment and the disillusion- 
ments faced in making the earlier concepts operational. 
During the period of the second generation computers, an 
MIS was considered almost synonymous to a fully integrated 
system, and even with the "total systems." Neither of these 
concepts was found to be fully operational and more modest 
ideas had to be accepted. With the advent of third genera- 
tion computers, however, the concept of MIS expanded to 
cover not merely the integration of systems, but to involve 
it with the production, delivery and content of information. 



3. David H. Sanders, Computers and Management (New 
York: McGraw-Hill Book Co. , 1970) , pp. 13-lS. 

4. The discussion in this paragraph uses many of the 
observations made in Arthur B. Toan, Jr., "MIS -- A Status 
Report on the Concept and Its Implementation," Journal of 
Accountancy . CXXIX (June, 1970), pp. 77-83. 



81 



Characteristics of MIS 

A management information system can be defined in such 
a variety of ways as to be virtually meaningless.^ A con- 
sideration of some of the definitions given in the litera- 
ture will, however, clarify its meaning to some extent and 
indicate its functions. . , . , 

Rubin - - . . a management information system is the 
expression of a philosophy of information manage- 
ment based upon an organization's long-term 
objectives . 6 

Milano - - . . a concept of managing an enterprise as 
an integrated whole with the assistance of a 
systematic application of information and com- 
puter technology -- in short, automating and 
integrating data from the various functional 
management areas.'' 

Colbert - - . . an organized method of providing each 
manager with all the data and only those data 
which he needs for decision, when he needs them, 
and in a form which aids his understanding and 
stimulates his action. ^ 

Stevens - - . . a means of communication which com- 
bines the planning, doing, and reviewing elements 
of the management process into an integrated and 
coherent whole. It is designed to provide each 
manager, whatever his status, with all the rele- 
vant, verifiable, quantifiable, and unbiased 
evidence he will use for making decisions. This 



5. Ibid . , p. 78. 

6. Martin L. Rubin (ed.), Handbook of Data Process ing 
Management (Princeton: Auerback Publishers, 1971), Vol. S, 
p. 155. 

7. James V. Milano, "Modular Method of Structuring 
WIS," Journal of Data Management . VIII (February, 1970), p. 18. 

8. Bertram A. Colbert, "Pathways to Profit: The Manage- 
ment Information System," Manageme nt Services, IV (September- 
October, 1967), p. 16. 



82 



information is to be presented to him in such a 
way so as to stimulate behavior that will lead 
to the attainment o£ the goals established for 
the entire management process. 9 

To an - - .a computer-based, integrated, accessible, 
timely and/or interactive as well as important 
to the essential functions of management . 10 

Godfrey and Prince - -.. a computer-based informa- 
tion network encompassing one or more operating 
systems that provides relevant information to a 
decision maker or decision making group and 
contains the appropriate mechanism for handling 
a decision maker's responses to these relevant 
data in terms of changes in parameters and 
variables of programmed decision models. H 

Stern - - . . an automated system which presents 
information, both internal and external to the 
business , that aids in making a specific set 
• of routine decisions. 12 

Kennevan - - . . an organized method of providing ' 
past, present and projection information 
relating to internal operations and external 
intelligence. It supports the planning, con- 
trol and operational functions of an organiza- 
tion by furnishing uniform information in the 
proper time-frame to assist the decision-making 
process. 13 



9. William T. Stevens, The Development of a Multi- 
Dimensional Concept of Management Information Systems, with 
Partic u lar Reference to the Concept ual Framework of Manage ^ 
ment Accounting (Gainesville , Fla. ,. University of Florida, 
lyyoj , pp. 191-192. 

10. Toan, p. 78. 

11. James T. Godfrey and Thomas R. Prince, "The Account- 
ing Model from an Information Systems Perspective," Account - 
ing Review . XLVI (January, 1971), p. 77. 

12. Harry Stern, "Management Information System -- IVhat 
It Is and IvTiy," Mana gement Science, XVII (October, 1970). 

p. B-121. 

13. Walter J. Kennevan, "MIS Universe," Data Manage - 
ment, VIII (September, 1970), p. 63. This is~the synthesis 
prepared from a number of definitions of MIS considered by 
him. 



83 



These definitions specify a number of common character- 
istics of MIS although they differ in relative emphasis. 
Before any generalized conclusions are drawn for use in this 
study, it is, however, necessary to consider two related 
concepts of total information systems and integrated infor- 
mation systems which have been referred to in most of the 
cited definitions directly or indirectly. 

Total systems and integrated systems .- -Though these two 

terms are often used synonymously, or as very closely re- 
14 

lated, they are essentially distinct concepts and have 
important implications. The concept of total information 
embodies the notion ithat all of the relevant data can be 
stored in a computer and disseminated as needed and in the 
appropriate form to all those requiring such data."'"^ A 
total system provides the maximum pertinent information that 
management or operations requires to effectively discharge 

14. For example, see William E. Swyers , "Integrated 
Information Systems and the Corporate Controllership Func- 
tion," Management Accounting , L (October, 1968), p. 19; 

J. W. Haslett, "Total Systems -- A Concept of Pro- 
cedural Relationships in Information Processing," in Total 
Systems , Eds., E. D. Meacham and V. B. Thompson (Detroit : 
American Data Processing, Inc., 1962), pp. 16-19; 

R. L. Martino, Information Management: The Dynamics 
of MIS (Wayne, Pa.: Management Development Institute, 
Division of Information Industries, Inc., 1968), p. 77. 

15. Neil C. Churchill and Andrew C. Stedry, "Extending 
the Dimensions of Accounting Measurement," Management 
Services , IV (March- April , 1967), p. 20. ' 



84 



their assigned responsibility at all levels. Integration 

involves taking a wide variety of information and blending 

1 7 

It into a meaningful whole. It is possible to have 

degrees of integration depending upon the design of the 
1 8 

system. An integrated system may even be conceived of as 
a combination of a number of interdependent subsystems.''"^ 
An important aspect of the integrated system is the utili- 
zation of single source data for multiple usage, whereas in 
a total information system multiple records of similar data 
may be made . . . 

Several empirical studies have found that the total 
systems concept is no longer considered to be an achievable 
objective. Sollenberger has noted that the use of the term 



16. See Richard W. Graham, Jr., "Total Systems Concept, 
in Financial Information Systems , Eds., James B. Bower and 
William R. IVilke (Boston: Houghton Mifflin Company, 1968), 
p. 79; 

A. F. Moravec, "Basic Concepts for Designing a 
Fundamental Information System," Management Services , II 
(July-August, 1965), p. 38. 

17. Robert Beyer, "A Positive Look at Management Infor- 
mation Systems," Financial Executive , XXXVI (June, 1968), 

p. 52 . 

18. Peter P. Schoderbek and Stephen E. Schoderbek, 
"Integrated Information Systems -- Shadow or Substance?" 
Management Adviser , VIII (November-December, 1971), p. 28. 

19. Systems and Procedures Association, Busines s 
Systems (Cleveland, Ohio, 1966), p. 2-27. 

20. See ibid . , p. 2-25 ; 
Moravec, p. 38. 



85 

2 1 

"total systems" is probably dead or dying. Toan observes 

that the notion of "total" is now seen to be ridiculous in 

2 2 

any literal sense of the word. Therefore, in the opera- 
tional definition of MIS which v.'ill be developed for the 
purposes of this study, the total systems concept will not 
be considered to be an essential part of MIS. The use of 
integrated systems is, however, found to be on the increase, 
and will, therefore, be included in that definition. 

Functions of MIS . --The functions carried out by MIS 
may not be identical for all organizations. On the basis 
of their empirical studies, Ilolden, Pederson and Germane have 
suggested the following generalized classification of the 
applications of MIS: (1) record keeping, (2) problem solv- 
ing, and (3) automatic control. 

Characteristics of MIS . --The characteristics of MIS 
which are brought out by the definitions cited earlier and 



21. Harold M. Sollenberger , "Management Information 
Systems in the Real World," Management Services , VI 
(November-December, 1969), p. 37. 

22. Toan, p. 78. 

23. For example, see Neal J. Dean, "The Computer Comes 
of Age," Harvard B usiness Review, XLVI (January- February , 
1968), pp". 89-901 

Robert V. Head, "Management Information Systems: 
A Critical Appraisal," Datamation , XIII (May, 1967), p. 25. 

24. Paul E. Holden, Carlton E. Pederson and Gayton E. 
Germane, To p Manage ment (New York: McGraw-Hill Book Co., 
1968), p. 17"¥: 



I 



86 



the foregoing discussion may now be listed as follows. 

(1) An MIS is a man/machine system. 

(2) Its input is data which it processes into the out- 
put, information. The processing includes model building, 
programmed decision making, and problem solving. 

(3) Information is provided to the decision making and 
operations systems of the organization and constitutes a 
substantial part of their informational needs. 

(4) There are no constraints on the types of data used 
and information produced, which may be, for example, inter- 
nal, external, past, present or projected. 

(5) Though automation is not considered essential, for 

all practical purposes, use of electronic data processing 

and communication equipment forms a necessary element of the 
25 

system. The level of technology in use would determine 
several of the features of an MIS, including the time dimen- 
sion, accessibility, and system/user interaction. 

(6) It utilizes single source data for multiple usage. 

An operational definition of MIS .--A management informa- 
tion system is an integrated system which uses data as its 
input, processes them with the aid of electronic data pro- 
cessing and other equipment, and produces information as its 
output which is supplied for use by the other systems of the 
organization as a part of their informational needs. There 



25. This aspect of MIS will be further considered in 
a later cart of this chapter. 



87 



are no specific constraints on its input, output and pro- 
cess. The process includes model building, programmed 
decision making and problem solving. 

MIS From the Systems Point of View 

An MIS is a system by definition, and the systems 
approach may be adopted for its clear understanding. 

Purpose of MIS I.' .i : 

The purpose of MIS is to provide information to the 
other systems within the organization, primarily to the 
decision making system. Such information is used to facili- 
tate the decision making process and the operations of the 
business. However, information required to be supplied to 
external users may also be provided by MIS, even if as a 
by-product. Providing information which will be found 
useful by the recipients is something more than merely 
managing information. Information management will be con- 
cerned with the rapid collection, processing, and display 

of data, while MIS restructures the data so as to serve its 
27 

purpose. i 

26. See John G. Burch , Jr., "An Independent Information 
System," Journal of Systems Management . XXIII (March, 1972), 
pp. 36 , 37~j 

James D. Gallagher, Management Information Systems 
and the Computer . AMA Research Study #51 [New York: American 
Management Association, 1961), p. 62. 

27. Schoderbek and Schoderbek, p. 27. 



88 



Structure of MIS 

In order to serve its purpose and to carry out its 
process, an MIS has several elements: a data base, elec- 
tronic data processing devices and communication links, pro- 
grams and routines library, a standardized report system, 
operations research, and programmed decision rules. This 
structure may be considered to consist broadly of the com- 
puter and operations research, where the term "computer" is 
used in a broad sense to include all EDP and communication 
equipment, the data base, and the programs and routines 
library. Human beings are, of course, required to install, 
maintain and operate the system as well as to make improve- 
ments and changes as required by changes in the environment. 
Insofar as the routine operation of the MIS is concerned, ' 
man may be seen as the helper of the machine; only in the 
design and development of MIS does he have the dominant role. 

Input of MIS 

The input of MIS' is data. For computer-based systems 
a distinction must be made between data capture and data 
entry which are two separate operations. Data are meaning- 
ful to the person who originally captures them. This oper- 
ation is performed in the majority of instances by pencil 
2 9 

and paper. Their entry into the system requires 

28. Rubin, p. 110. 

29. Edward M. Bennett, "Data Entry Through Distributed 
Data Processing," Journal of Systems Ma nagement, XX 
(September, 1969) , p. 30. 



89 



man/machine interface. In order to increase the accuracy 

of the input, it has been suggested by some writers that the 

two operations of capture and' entry may be unified and 

30 

carried out by the same person. Accuracy alone, however, 
would not ensure reliability which requires a correspondence 
between the data captured and state or event represented. 
It seems that this aspect of the data input has not received 
as much attention from writers in the field of systems 
management as it deserves. Milano considers the question of 
the responsibility for the integrity of the data base and 
thinks that the person who shoulders this responsibility 
should have some form of control over all aspects of the 
system. 

Process of MIS 

This consists primarily of storage, retrieval, and 
programmed operations; and interfaces with the entry of 
input and communication of output. The level of technology 
and the degree of sophistication play an important part in 
the process of MIS; but the human involvement in its design 
and development is the decisive factor in the efficient use 
of the system. Model building, programmed decision making, 

30. For example, see ibid . , p. 30; 
Rubin, Vol. 4, pp. 1-2. 

31. Milano, p. 20. 



90 



and problem solving form an important part of the process 
of MIS. .. 

Output of MIS 

The output of MIS is infoxmation which is communicated 
to the users. Earlier, it was indicated that providing the 
totality of all the information is not now considered to be 
an achievable objective. If the system is to be of any 
value, the output should be designed using strict standards 
and with the using environment in mind. Study of the user 
needs which the output of the system must satisfy is one of 
the important aspects of the design and development of MIS. 

Dynamic Development of MIS 

An MIS operates in a dynamic environment, and in order 
to maintain its usefulness it should undergo continuing 
modification and improvement. Moreover, since the MIS will 
never be able to provide all the information required for 
decision making, there always is scope for an expansion of 
its activities. Restructuring the system by adding or sub- 
tracting elements and by adding or subtracting rules (rela- 
tionships) is the very essence of the systems concept. 
Operations research (hereafter referred to as OR) plays the 

32. Norman H. Carter, "Introduction to This Data Gather- • 
ing Issue," Journal of Sy stems Management, XX (September, 
1969), p. 117 ^ ^ 

33. Martino, p. 25. 



91 



crucial role in the dynamic development of the MIS by dis- 
covering new relationships and improving those under use. 

A Model of MIS 

A management information system as described above may 
be represented by the diagram shown in Figure 2 on page 92. 
After the input has entered into the system, it may either 
be stored, or processed immediately. If stored, it may be 
retrieved later on and then processed. After processing, 
the information may again be stored, or immediately communi- 
cated as output. Stored information may be communicated 
later on through retrieval. There may be various levels of 
sophistication in these activities. Some examples are: 
storage with sequential access, random access or on line, 
batch processing or real time processing, and use of inter- 
active devices by users on a time-sharing basis. It is 
essential that the OR section keep in touch with the infor- 
mation needs of the users and any changes therein. New or 
better programs are developed with the help of OR, which may 
be incorporated in the processing subsystem adding to, or 
substituting, the older programs in use. Users may receive 
some data directly or through other sources, and may also 
contribute data as an input to the system. ; . 



92 




Figure 2. A model of the management information system. 



93 



Specialized Skills Required for MIS Operations 

An MIS needs specialized skills o£ several different 
disciplines. Its techniques and tools are borrowed prin- 
cipally from management science, accounting, computer tech- 
nology, operations research, systems engineering, economics, 
statistics, information science, and behavioral sciences. 
These disciplines lend to MIS a developed expertise in 
problem solving. ^'^ Several of the fields included in this 
list are in themselves of an interdisciplinary character, 
and hence, it may be regarded as repetitive. This is par- 
ticularly true of operations research which is sometimes 
considered to be synonymous with management science and 
adopts techniques from many disciplines.^^ The skill 
requirements for MIS may conveniently be summarized by 
including only computer technology and OR methods. This 
is consistent with the structure of MIS mentioned in the 
preceding section of this chapter. The role of computer 
and OR will be further considered in this section. 

MIS and the Computer 

The term "computer" is being used in this study in a 
very broad and undefined sense. It includes all electronic 



34 . Rubin, Vol. 5 , p. 17 3. 

35. E. Leonard Arnoff, "Operations Research and 
Decision-Oriented Management Information System," Management 
Accounting , LII (June, 1970), p. 12. 

36. Holden et al . , p. 166. 



94 



data processing and communication devices and techniques. 
There are many levels of sophistication in the related tech- 
nology, and the term "computer" as used here covers any such 
level . 

It has been indicated earlier that the concept and 
applications of MIS have evolved along with the development 
of the computer and its commercial applications. The rela- 
tionship between these two is so close that many writers 

consider them to be almost synonymous, while others specific 

37 

ally state that they are not identical. Use of computers 

is not considered necessary for the operation of MIS by some 

3 8 

of the authors. A more realistic view is expressed by 

Beyer, who thinks that while a computer has little to do with 

the concept of the systems, it is obviously essential to 

39 

their functional effectiveness. As pointed out in Chapter 
40 

I, this study relates primarily to those organizations 

37. Among those who think they are synonymous is 
Leonard W. Hein, "The Management Accountant and the Inte- 
grated Information Systems," Management Accounting , XLIX 
(June, 1968) , pp. 34-38; 

Those who think they are not synonymous include 
Toan, pp. 77-78; 

Harry Stern, "Information Systems in Management 
Science," Management Science , XIV (December, 1967), p. B-25S 

38. For example, see Robert S. Stich, "Pitfalls to 
Systems Management," Management International Review , X 
(1970/1), p. 20. 

39. Robert Beyer, "Management Information Systems: 
Who'll Be in Charge?" Manage ment Accounting, XLVIII (June, 
1967), p. 6. 



40. See p. 13. 



95 



which use computers as an element of their information sys- 
tems. Hence, computer technology will be considered as a 
necessary part of the skill requirements for MIS operations. 

The computer offers a number of advantages to business 
organizations: (1) it is extremely fast and accurate; 
(2) it can carry out arithmetic and logic functions; (3) it 
has capacity to store and handle large volumes of informa- 
tion; (4) its costs are at an acceptable level; and (5) it 
greatly improves accessibility of information to users by 
integrated and centralized data files, retrieval systems 
and interactive devices. '^'^ In theory, the computer can 
perform any specified task that does not involve physical 
impossibilities or logical contradictions.^^ However, tech- 
nological development has not quite reached that stage. 
Time-sharing, table-top display units and other interactive 
devices, remote data entry systems and terminals, on line 
real time systems, computer output microfilm, and computer 
instructions in ordinary language are among the techniques 
which have been or are being developed to improve the com- 
puter's usefulness. However, for the effective and profit- 
able use of the computer, operations required to develop 

41. See Beyer (1967) , p. 6 ; 

Arthur B. Toan, Jr., Using Informat ion to Manage 
(New York: Ronald Press Co., 1968) , pp. Il2-ll7. 

42. Ira G. Wilson and Marthann E. Wilson, Information . 
C omputer, and System Design (New York: John Wiley and Sons 
Inc. , 1967) , p. 19. 



96 



information should have the following characteristics: 
(1) a number of interacting variables, (2) reasonably accu- 
rate values, (3) consideration of speed as an important 
factor, (4) requirement of accuracy, (5) repetitive applica- 
tions, and (6) large volume of input and output. '^^ It may 
be noted that, except in certain limited ways,^^ the com- 
puter has no capability to process nonquantitative data. 

Such data, however, often play a part in the outcome of 
J • • 45 

decisions. Because of these constraints, it is difficult 
to use computers in the area of top level decision making 
to generate new information in neAv forms. Moreover, being 
a highly sophisticated tool, the computer needs to be prop- 
erly controlled. As stated by May, "... without adequate 
control it is entirely possible that the computer will be 
the weakest link in an information processing system."^'' 



43. John Dearden, "Can Management Information be Auto- 
mated," Harvard Business Review, XLII (March- April , 1964). 
pp. 130-T3T:^ 

44. Examples of the handling of nonquantitative data 
that can be performed on the computer are the storage, 
indexing, and retrieval of such data. 

45. Ernest Dale, "A Plea for Coalition of the Quanti- 
fiable and the Non-Quantifiable Approaches to Management," 
Academy of Management Journal , XII (March, 1969), p. 16. 

46. James W. Taylor and Neal J. Dean, "Managing to 
Manage the Computer," Harvard Business Review , XLIV 
(September-October, 1966) , p. 105. 



47. Phillip T. May, Jr., "System Control: Computers 
the Weak Link?" Accounting Review , XLIV (July, 1969), p. 592. 



97 



MIS and Operations Research 

Operations research is the systematic study of the 
basic structure, characteristics, functions and relation- 
ships of an organization. It is based on the assumption 
that economic systems, like the physical world, contain a 
good deal of orderliness and regularity. Hartley defines 
it in the following words: 

Operations research is a collective effort of 
many types of talent concentrating on the appli- 
cation of the scientific method to the develop- 
ment of predictive models which describe the 
stable patterns of order underlying certain 
business operations and thereby enabling the 
provision of quantitative information which is 
helpful in solving executive -type problems. 49 

Many OR problems are generated from the need to examine 
or model operational subsystems for use in the MIS. Model- 
ing, in this context, is the development of a mathematical 
or statistical formulation to act as a replica of the opera- 
tion to be examined. Some of the widely used techniques of 
OR are: linear programming, network techniques, dynamic pro- 
gramming, queuing theory, simulation, games and decisions, 
and statistical tools. An MIS may adopt either the stand- 
ard models which have been developed and are extensively 

48. Arnoff, p. 12. 

49. Ronald V. Hartley, "Operations Research and Its 
Implications for the Accounting Profession," Accountinc^ 
Review , XLIII (April, 1968), p. 321. 

50. For a brief discussion of these techniques and 
their applications, see Rubin, Vol. 5, pp. 173-178. 



98 



used, such as inventory models, statistical decision theory 
models, PERT/CPM, and capital budgeting models; or ad hoc 
models developed to fit the specific requirements of a 
problem. 

OR gives consideration to a practical solution of a 

problem as contrasted to the purely mathematical, or theoret 

52 

ical, solution. A solution control process is an essen- 
tial part of OR. It is necessary for evaluating and making 
a decision about the validity, usefulness and need for 

r T 

changes in any model that is being used repetitively. In 
terms of MIS, the model development process of OR will be 
required in the original design and subsequent expansion of 
the system, while the solution control process is necessary 
for its proper control and modification needed to keep it 
consistent with the changing internal and external environ- 
ment. 

For a successful solution by the application of OR tech 
niques, a problem should meet several conditions: (1) It 
must be possible to represent the important aspects of the 
situation by well-defined mathematical variables. (2) The 
estimates of its parameters should have sufficient accuracy. 
(3) It should fit the available mathematical tools. (4) It 



51. Hartley, p. 324. 

52. Arnoff, p. 13. 

53. Hartley, pp. 323-324. 



99 

should be small enough for calculation to be made in a reason- 
able time and with reasonable cost.^'^ 

Limitations and Deficiencies of MIS 

A number of empirical and other studies reported in the 
literature bear out the fact that expectations concerning 
MIS have met only with partial success in most organizations 
and that it has not been possible to utilize in full the 
potential of the computer. The face.tious definition of 
MIS coined by Newlin, which is quoted at the beginning of 
this chapter, conveys this situation very forcefully. Some 
important deficiencies in the operations of MIS are listed 
below. 



54. Herbert A. Simon, The New Science of Management 
Decision (New York: Harper and Brothers Publishers, 1960), 
p. 17. 

55. For example, see Russell L. Ackoff, "Management 
Misinformation Systems," Management Science, XIV (December. 
1967), p. B-147; 

William M. Zani , "Blueprint for MIS," Harvard 
Business Review , XLVIII (November- December , 1970) , p. 95 ; 

Frank P. Cougdon, Jr., "Advance Planning for the 
Systems Function," Journal of Systems Management, XXI 
(August, 1970), p. m 

Sollenberger , p. 30; ■ 

Donald S. Feigenbaum, "The Engineering and Manage- 
ment of an Effective System," M anage ment Science, XIV 
(August, 1968), pp. 722-724; 

Ward A. Fredericks, "A Manager's Perspective of 
Management Information Systems," MSU Business topics 



100 

Overabundance of irrelevant information . - - In many 
organizations with computer-based MIS, managers often suffer 
from an information overload. "It is so easy to get so 
much information so fast from the computer files that tempt- 
ation [to supply all of it] overcomes . "^^ There is a 

tendency to cominunicate all the data that anybody might 
5 8 

need. The overabundance relates to information that is 
irrelevant to the needs of the users. Managers must spend 
a great deal of time separating the relevant from the irrele- 
vant, and searching for the kernels in the relevant docu- 
59 

ments. In the colorful words of Martino: "We are drown- 
ing in a sea of facts while dying of thirst for information." 



(Spring, 1971), pp. 7-12; 

John T. Garrity, "The Management Information Dream 
-- The End or a New Beginning?" Financial Executive , XXXII 
(September, 1964), p. 11; ~" 

John Diebold, "ADP -- The Still-Sleeping Giant," 
Harvard Business Review , XLII (September-October, 1964), 
P- 60.; 

Edward M. Tolliver, "Myths of Data Automation," 
Journal of Systems Management , XXI (August, 1970), p. 37. 

56. Ackoff, pp. B-147-148. 

57. Ronald A. Bridges, "The Mad, Mad World of Informa- 
tion," Journal of Systems Management . XXIII (January, 1972), 
p . 17 . 

58. Elmer B. Staats , "Information Needs in an Era of 
Change," Management Accounting . L (October, 1968), p. 14. 

59. Ackoff, p. B-148. 

60. Martino, p. 31. 



101 



Inadequate knowledge of information needs .-- Information 

is not always tailored to users' needs, presumably because 

of the failure to ascertain their specific requirements.^"*" 

Systems people are often unaware of the exact needs of the 
6 2 

management. One author thinks this factor to be of such 
importance that he considers the practical imaginative deter- 
mination of the information needed as responsible for 90% 
of the successful utilization of the computer. 

A communication gap between the systems people and 
users of information . - -This is perhaps the one deficiency 

which has attracted the attention of the largest number of 
, 64 

researchers, and is at the root of many other deficiencies 
in the operations of MIS. The communication gap exists not 
merely between the systems people and the users of informa- 
tion, but among systems people also. Stuart describes the 
situation very vividly and effectively: 



61 . Staats , p. 14 . 

62. Gallagher, p. 13. 

63. Tolliver, p. 38. 

64. For example, see John B. Wallace, "Improving Com- 
munication Between Analysts and Users," Data Management, 

X (June, 1972), p. 21; 

William L. Kelly, "General Management's Understand- 
ing and Use of MIS," Data Management , VIII (September, 1970), 
pp. 102, 104; 

Walter J. Stuart, "An Experiment in DP Management 
-- Revisited," Datamation, XV (November, 1969), p. 151; 

Joseph Poindexter, "The Information Specialist: 



102 



... systems accomplishment involves a great deal 
of communication, and very difficult communica- 
tion at that. It seems that those concerned all 
speak in different languages, not only with 
reference to the user but even right there in 
the computer complex. Input/output staff are 
thinking about the source data and the tables 
or graphs which they must review and approve. 
Operators tend to deal with the hardware, the 
dials, buttons and routines of processing. 
Analysts speak a jumble of fas t- changing com- 
puterese and what little they have come to under- 
stand of the substance of their projects. Pro- 
grammers actually begin to think, and I have 
heard at least one habitually sneak in languages 
like COBOL. Data librarians are involved with 
reel numbers, disc packs, dirty tapes, reten- 
tion dates, and that painful round of data 
journals. Users, of course, find themselves 
unable to speak to or understand anyone in the 
complex, except perhaps the review clerks who 
arc really in no position to help them. These 
are simply variations of the communications 
problem which has been beaten to death in 
modern management literature . 65 

Moore also provides a graphic description of the hopeless- 
ness of the situation: 

A user presumably knows what he wants, but he 
typically cannot conmiuni cate with the machines 
and has great difficulty in explaining his need 
to the man who can make the machines talk. The 
EDP analys t-programer presumably can make the 



From Data to Dollars," Dun's Review , XCIII (June, 1969), 
p. 36 ; 

C. F. Tilstra, "Communicating MIS," Journal of 
Systems Management , XXIII (June, 1972), pp. 36-38 .; 

Michael D. Moore, "Communication Betvv^een Manu- 
facturing and Systems Groups," Journal of Systems Manage - 
ment , XXI (October, 1970), pp. 22-24 ; ^ 

William Exton, Jr., "The Information Systems 
Staff: Major Obstacles To Its Effectiveness, And a Solution," 
J ournal of Systems Management , XXI (July, 1970), p. 34. 



65. Stuart, p. 151. 



103 



machine sing i£ he wants to, but he typically 
has a problem scoring the music because he 
can't figure out the user's compos ition . 66 

Inability of decision makers to specify their informa - 
tion needs .-- Inadequate knowledge of the information needs 
of decision makers exists not solely because of the failure 
on the part of systems analysts to ascertain the same. 
Often, the decision makers themselves are not sure of the 
information they require. For a manager to know what infor- 
mation he wants, he must be aware of each type of decision 
he would make and have an adequate model of each. These 
conditions are seldom satisfied. Schoderbek and Schoder- 
bek state that there is much weighty evidence that managers 
can not identify the important variables involved in deci- 
sion making and can not reduce the decision process to 
quantifiable expressions.^^ Most managers do not know 

nearly as well as they think they do the way in which they 

69 

actually make decisions. 

Exclusion of judgmental factors . --In an earlier chapter 
it was pointed out that decision making involves the use of 
subjective knowledge and subjective judgment of the decision 

66. Michael R. Moore, "Pitfalls in Planning an EDP 
Installation," Mana gement Services, V (September- October . 
1968), p. 29. 

67. Ackoff, p. B-149. 

68. Schoderbek and Schoderbek, p. 28. 

69. George F. Weinwurm, "Managing Management Informa- 
tion," Management International Review , X (1970/1), p. 43. 



■ : 104 • . 

70 

maker. These, by definition, can not be supplied by a 

computer-based information system. The computer requires 

only unequivocal instructions, and it is not possible to 

communicate undocumented judgment and interpretations to 
7 1 

the computer. 

Inadequate control over input .-- Computer input is given 
less thought than programs. This situation arises because 
of the attitude that even a poor method of creating input 
works, the fact that source materials are created in areas 
outside the MIS, and the tendency to consider that the "world 
ends at the door of the computer room."''^ Sollenberger 
found that assigning responsibility for the quality of input 
data is a relatively new problem. May considers the con- 
trol of input data as one of the most critical areas in the 
MIS and thinks that such control should apply both to the 
methods of capturing data and to the accuracy of the data 
captured. ''^ 

70. See pp. 33-34. 

71. Charles L. Long, "Needed: A New Profession," Journ al 
of Systems Management . XXII (June, 1971), p. 33. 

72. Rubin, Vol. 4, p. 1. 

73. Harold M. Sollenberger, Major Changes Caused by 
the Implementation of a Management Information System , 
N.A.A. Research Monograph ?4 (New York: National' Association 
of Accountants, 1968), p. 72. 

74. May, p. 5 89. 



105 



Lack of flexibility in MIS .--A large computer project 

75 

IS alv^/ays a one-tiine job. An MIS lacks flexibility and 

is difficult to change/^ Prince thinks that in a dynamic 

setting where short-run objectives may change frequently, 

7 7 

MIS may not be suitable or feasible. The Committee on 

Information Systems points out the need for flexible infor- 

7 8 

mation systems. 

Incompatibility of sophisticated information with 
management capabilities .- -An MIS produces highly sophis- 
ticated information. The OR specialists are trained to 
avoid suboptimization and hence create "grand schemes." 

The management, however, has not prepared itself to use such 
79 

analyses. It does no good to install systems of a high 
order if managers at all levels are unable to interpret and 
make use of their output. The quality of information can 
be upgraded much more rapidly than the quality of the 



75. J. E. Connor, "On-Time Systems Management," Data- 
mation, XV (April, 1969), p. 60. • 

76. Toan (1970) , p. 80. 

77. Thomas R. Prince, Information Systems for Management 
Planning and Control (Homewood, 111., Richard D. Irwin, Inc 

lyyuj , pp. 43'^T4: * 

78. American Accounting Association's Committee on 
Information Systems, 1970-71, "Report of the Committee on 
Information Systems," Accounting Review, Supplement to 
Volume XLVII (1972), p. l95. 

79. Robert F. Vandell , "Management Evolution in the 
Quantitative World," Harvard Business Re view. XLVII I 
(January-February, 19 70) , p. 84. 

80. Sanders, p. 149. 



. ' ■ 106 

8 1 

management. Hence, the need to educate managers is con- 
sidered to be a vital step in attaining an efficient system. 

Basic Reasons of the Deficiencies of MIS 

Because of the deficiencies just discussed, management 
information systems have not been able to adequately achieve 
their purpose of providing information to the other systems 
of the organization. It is not suggested here that all such 
systems suffer uniformly from all these deficiencies. This 
discussion does, however, imply tliat for a computer-based 
information system to be successful, care must be taken to 
avoid the possibility of their occurrence. 

Though some shortcomings may be caused by the poor 
design or poor implementation, the following appear to be 
the basic causes of the observed deficiencies of MIS: 

(1) Limitations of the computer and OR methods 
which constitute the structure of MIS. 

(2) A lack of people within the system who can 
effectively communicate with and understand 
the needs of management and other users of 
information. 

(3) Unbalanced development of managerial skills 
and information processing techniques. 



81. Donald F. Cox and Robert E. Good, "How to Build a 
Marketing Information System," Harvard Business Review , XLV 
(May-June, 1967), p. 152. 

82. Sollenberger (1968), p. 92; 



Also see Sanders, p. 149. 



107 



lTnp7-ovements in MIS Suggested in Literature 

A number of suggestions have been made in the litera- 
ture to improve MIS. These suggestions revolve around a few 
basic ideas which are briefly described and evaluated below. 

Introduction of a New Human Element in MIS 

Various writers have recommended the addition of a new 
human element in the system, which would eradicate some of 
the deficiencies observed in its operations. However, the 
functions specified for this new agency in the various pro- 
posals vary widely. 
8 3 

Brown ' has urged the creation of an information agency 
consisting of representatives from all departments of the 
organization. This agency would integrate, evaluate, and 
compare the various kinds of information coming into the 
organization, and would have no departmental bias. However, 
the search for information and its codification would be 
carried out by the intelligence mechanisms under the control 
of the various levels of management. Under Brown's sugges- 
tion, the information agency would be merely a clearinghouse. 
Not much advantage would be taken of functional specializa- 
tion, and the organization would not receive the benefits of 
progressive segregation of its subsystems. 



83. Warren B. Brown, "Systems, Boundaries, and Informa- 
tion Flow," Academy of Man agement Journal, IX fDecember, 
1966), pp. 318-32y: 



108 

84 

Rubin would like to introduce a data control and 
design authority under the implementation manager of MIS. 
It would have absolute authority over the data itself and 
how it is used. 

8 5 

Cox and Good suggest the use of information coordina- 
tors who would be capable of understanding both the informa- 
tion needs of the management and the systems problems. 

Long^^ finds the need for a new profession -- that of 
information engineers. There would be an information engi- 
neering office in each major functional area responsible for 
analyzing and defining in noncomputer terms the systems 
objectives and requirements of the staff and operating 
managers. Information engineers must be developed from 
people with analytical expertise and an ability to logically 
define complex conditions, parameters, and constraints. This 
suggests that they should come from professions such as 
management analysis or industrial engineering. The members 
of the new profession suggested by Long would tackle only 
one of the problems faced by MIS -- that of understanding 
the information needs of the decision makers. If a distinct 
profession has to be introduced into the business organiza- 
tion, it may be worthwhile to investigate whether the 



84. Rubin, Vol. 5, p. 136. 

85. Cox and Good, pp. 150-151. 

86. Long, p. 33. 



109 

information system may be improved in other areas also by a 
proper and expanded definition of the functions of such a 
profession. 

Acquisition of Skills in EDP and Functional Areas 

Several authors have suggested that skills relating to 
EDP as well as those relating to functional areas of the 
business should be acquired by the same set of people so 
that they may communicate with each other better and under- 
stand the needs and problems of each other. This would, 
hopefully, remove several of the deficiencies in the opera- 
tion of MIS. 
87 

May recommends that the systems personnel should 
possess technical ability as well as a comprehensive knowl- 
edge of business areas being automated. On the other hand, 

8 8 

Kelly thinks that the functional managers should be ade- 
quately informed about the MIS. Kelly has made this sugges- 
tion on the basis of the results of his empirical study in 
which he found the following means of dialogue between the 
systems specialists and decision makers: the question and 
answer technique (where the systems man asks the questions) ; 
assignment of a systems man to the functional user group; or 
assigning a man from the user group to the systems depart- 
ment. He did not find any of these approaches to be adequate 
and therefore made the suggestion mentioned earlier. 

87. May, pp. 587, 588. 

88. Kelly, p. 103. 



110 



Some other writers, however, have expressed serious 

doubts about the feasibility of the implementation of such 

89 

suggestions. Dearden asserts that no man can possess a 
broad enough set of special skills, and that the "true MIS 
expert" does not and can not exist. Similarly, Long^'^ 
thinks that to expect even the most capable individual to 
be both an expert systems designer and a functional expert 
is unrealistic, except in the case of fairly standard func- 
tions such as payroll accounting. 

Source Data Automation 

Mechanization of the input process has been suggested 

by several writers to control the input to the system. 
91 

Bennett distinguishes between the operations of data cap- 
ture and data entry, and suggests the unification of the 
two, giving the same people who capture data the capability 
of entering them into the system in computer usable form. 
This would involve a man/machine interface at the data cap- 
ture position. 
.92 

Rubin specifies three types of source data automation. 
In a fully automated system, a machine produces the original 



89. John Dearden, "MIS Is a Mirage," Harvard Bu siness 
Review, L (January- February , 1972), p. 93. ~ 

90. Long, p. 33. 

91. Bennett, pp. 30-31. 

92. Rubin, Vol. 4, pp. 7-14. 



Ill 



information. In a martially automated system, the machine 
would accept a part o£ the input in some "machinable" form 
and merge it with manual information. In a manual system, 
a manually operated mechanism would be used to encode data 
into digital form. ' - 

Fractionalization of MIS 

In order to make an MIS more manageable and to improve 

its efficiency, several alternative models of such a system 

have been suggested in the literature. These proposals 

amount to a division of MIS into several systems having 

certain common links. 
9 3 

Moravec has proposed a "fundamental information sys- 
tem." This system would contain only that part of data 
which is considered "absolutely essential" to the operation 
of the organization. All other data would be kept outside 
the system. However, data would be recorded only once at a 

central location. 

94 

Dearden suggests the breaking down of the MIS hori- 
zontally and vertically. According to his scheme, the func- 
tion of systems specification (e.g., information to be 



93. Moravec, pp. 37-45. 

94. John Dearden, "How To Organize Information Systems, 
Harvard Business Review , XLIII (March-April, 1965), 

pp. 65-73; 

Also see John Dearden and F. Warren McFarlan, 
MIS: Text and Cases (Homewood, 111.: Richard D. Irwin, Inc.. 
1966) . ' 



112 

i ' ■'* . ; ...... 

developed, its timing, and the format of inputs and outputs) 
should be decentralized to the operating management, while 
data processing and programming should be centralized. A 
business organization would have several information systems, 
major among them being the financial information, personnel 
data, and logistics information systems, and the minor sys- 
tems including marketing, research and development, strategic 
planning, and executive observation. All the major systems 
and some of the minor systems would use the centralized data 
base and EDP facilities, while other minor systems would 
carry out their own data processing. According to Dearden, 
this model would have the advantage that the information 
actually needed by users would be developed; different kinds 
of skills in specifying information needs would be fully 
utilized; and the centralization of the technical processing 
aspects would lend to economy and use of specialized knowl- 
edge and skill. 

An Evaluation of the Proposals 

The individual suggestions made in the literature are 
directed at, or appear to be adequate for, the solution of 
particular problems only. If any fundamental changes must be 
made, they should be such as to be capable of eradicating all 
or most of the observed deficiencies of MIS. Proposals for 
improvements should be evaluated keeping this situation in 
mind. 



113 



Introduction of a new human element within MIS may be 
a good way to solve many of the problems. Its functions 
should, however, not be confined to those suggested in 
individual proposals discussed earlier. This possibility 
will be further explored in Chapter VI of this study, and 
an investigation will be made as to what functions such a 
new agency may be expected to carry out successfully so as 
to eliminate the observed deficiencies of MIS. 

The acquisition of expertise in diverse fields of func- 
tional areas of business and EDP by the same set of people 
is a doubtful proposition and does not seem to be a realis- 
tic solution to the problems of MIS. Similarly, the proposal 
for source data, automation might not be found to be feasible 
if the reliability and accuracy of the input must be assured 
by prior verification and validation. 

A f ractionalization of the MIS would prevent organiza- 
tions from taking advantage of advanced technical capabili- 
ties such as integrated systems, interactive devices, model 
building, problem solving, and programmed decision making 
tools. Mere automation of existing information systems would 
not prove to be an advantageous utilization of computers and 
other advanced technological developments. 



114 

Summary of the Chapter .-^ 

A management information system is an integrated system 
which uses data as its input, processes them with the aid of 
electronic data processing and other equipment, and produces 
information as its output which is supplied for use by the 
other systems of the organization as a part of their infor- 
mation needs. There are no specific constraints on its 
input, output and process. The process includes model 
building, programmed decision making, and problem solving. 
Since the "total systems" concept is no longer considered to 
be an achievable objective, it is not referred to in this 
description of MIS. 

An MIS consists primarily of the computer and opera- 
tions research methods and specialized skills and expertise 
in these areas are required for its successful operation. 
The computer has the capability of processing large volumes 
of data accurately and extremely fast, but it is suitable 
for developing only certain types of information. Operations 
research is based on the assumption that economic systems 
contain a good deal of orderliness and regularity. Its 
techniques are helpful in solving various types of problems 
which meet certain conditions. 

It has been observed that in many empirical and other 
studies most organizations are unable to employ their manage- 
ment information systems effectively. The following prin- 
cipal deficiencies have been pointed out by researchers in 



115 



this field f (1) an overabundance of irrelevant information, 
(2) inadequate knowledge of information needs, (3) a communi- 
cation gap between systems people and users of information, 
(4) an inability of tlie decision makers to specify their 
information needs, (5) exclusion of judgmental factors, 
(6) inadequate control over input, (7) a lack of flexibility 
in MIS, and (8) an incompatibility of sophisticated informa- 
tion and management capabilities. These deficiencies can be 
related to the basic limitations of the structure of MIS, a 
lack of people within such systems who can communicate with 
and understand the needs of users, and an unbalanced devel- 
opment of managerial skills and information processing tech- 
niques. . 

Suggestions made in the literature for improvements in 
MIS revolve around ideas of introducing a new human agency 
within MIS, requiring acquisition of specialized knowledge 
both of functional areas of business and of EDP by the same 
set of people, mechanizing the input process, and fraction- 
alizing the MIS. It seems that the inclusion of a new human 
element within MIS has the greatest potential of eradicating 
the deficiencies of such systems. Hov\rever, the functions of 
such an agency need to be clearly indicated. 



CHAPTER V 

A SUGGESTED MODEL: THE CONTROLLED 
INFORMATION SYSTEM 

Purpose and Organization of the Chapter 

This study has so far considered the need for and 
importance of information for a business organization and 
the two alternative systems which are used in practice to 
generate information. It was determined that neither of 
these was able to fulfill adequately the information needs 
of the various users in the modern environment. Also, none 
of the suggestions given in the literature for their im- 
provement appear to be capable of leading to the achievement 
of this end. The purpose of this chapter is to suggest a 
model of a computer-based information system which would not 
suffer from the problems faced by the existing systems. The 
suggested model will be referred to as the controlled infor- 
mation system. 

The characteristics of a good information system will 
first be considered. The new model, as well as its elements 
and specialized skill requirements, will then be described. 
Finally, difficulties anticipated in the operation of the 
suggested model will be investigated, and the model will be 



116 



117 



evaluated on the basis of the criteria developed in this 
chapter as well as some of the criteria proposed in the 
literature. 

Characteristics of a Good 
Information System 

Before developing a model of an information system it 
is necessary to determine the characteristics of such a 
system which may be used as criteria to evaluate its sound- 
ness. These characteristics may be derived from the purpose 
of the information system and from the deficiencies observed 
in the operation of various systems which it should try to 
avoid. These matters have been discussed in some detail in 
the preceding chapters of this study. Utilizing the ideas 
gleaned from these discussions, the characteristics of a 
good information system may be briefly described as follows. 

Capability to Develop Various Types of Information 

An effective information system should have the capacity 
to accept and process all types of data (such as quantita- 
tive, nonquantitative , internal, external, past, present or 
projected) and to utilize all appropriate techniques and 
procedures to develop the required information (including 
the modern model building, problem solving and programmed 
decision making techniques). 



118 



Capability to Communicate the Required Information 

An efficient information system should have the capacity 
to fulfill the informational requirements of the decision 
making and operations systems of the organization and of 
the people outside the organization. In order to have this 
capability, the needs of the users must be kno\N'n , and the 
system should have adequate filters to ensure that informa- 
tion is communicated in accordance with such needs. If the 
recipients of information are themselves not sure of their 
requirements, the information system should be able to 
furnish information which may be reasonably expected to be 
used by the recipients and should keep in constant touch 
with their actual needs. It must avoid supplying informa- 
tion which is either not needed or is unused. The level of 
sophistication of the information supplied must be in keep- 
ing with the level of sophistication of the users. Where 
interactive devices are to be used by the decision makers, 
the system should provide adequate facilities for the same, 
such as a proper and constantly updated data base and an 
appropriate programs library. 

Flexibility 

The system should be amenable to change in accordance 
with the changing needs of the users of information. To 
accomplish this, it will be necessary to determine changes 
required and to be able to give effect to them. 



119 



Feasibility ; 

The model should be capable of being put into actual 
practice, both technically and economically. The principal 
economic aspect of the system would be the outcome of a 
cost/benefit analysis. Such an analysis may be carried out 
at two levels -- total cost and total benefits of the sys- 
tem as a whole and the incremental cost and incremental 
benefits of any additions or modifications in the system. 

It may be noted that these characteristics relate to 
the information system and not to any particular item of 
information developed and supplied by such a system. The 
standards relating to information as such will be considered 
in the later parts of this chapter and in Chapter VI. 

Necessity of a Man/Machine System 

In order to be able to acquire the characteristics ' 
mentioned in the foregoing section, the information system 
must be a man/machine system. Both men and machines have 
their capabilities and limitations. Advantages of utilizing 
computers and limitations on the types of information that 
can be developed with the use of computers were mentioned 
in Chapter IV. "'^ Human beings have the capacity of creative 
thinking, use of judgment, and flexibility in their approach; 
but they have low channel capacity, lack of reliability, and 



1. See pp. 95-96. 



120 
2 

poor computational ability. A proper combination of men ..„, 
and machines may be expected to have a mutually reinforcing 
effect and overcome the deficiencies of both. 

Man has a role to play in any system, and "full auto- 
mation" can never be achieved. Human beings must always 
supply the initiative, design the system, set criteria of 
satisfactory performance, operate the system, make constant 

adjustments in keeping with changing conditions, and take 

3 

action if an unforeseen crisis arises. However, in a man/ 
machine system, man must be recognized as one of its essen- 
tial parts and must be integrated into the system.^ The 
functions which are best handled on a computer can be 
mechanized, and those which are best handled manually should 
be left for men. ^ 

In the literature, initially, emphasis had been placed 
upon the technical aspects of information systems. Only 

2. Chadwick J. Haberstroh, "Organization Design and 
Systems Analysis," in Handbook of Organizations , Ed. J. G. 
March (Chicago: Rand McNally and Co., 1965), p. 1176. 

3. John A. Beckett, Management Dynamics : The New 
Synthesis (New York: McGraw-Hill Book Co., 1971), pp. 204-205; 

Ira G. Wilson and Marthann E. Wilson, Information , 
Computers, and System Design (New York : John Wiley and 
Sons, Inc. , 1967) , p. 9. 

4. Martin L. Rubin, Handb ook of Data Processing 
Management (New York: Auerback Publishers , 1971), Vol. 5, 
p. 132. 

5. R. L. Martino, Information Management: The Dynamics 
of MIS (Wayne, Pa. : Management Development Institute, ~ 
Division of Information Industries, Inc., 1968), p. 77. 



121 



recently consideration is being given toward blending the 
technical and human elements \\rith a view of attaining a 
greater degree of both effectiveness and efficiency through 
integration.^ One of the important characteristics of the 
model developed in this study is an effective functional 
integration of man/machine elements of the system. 

; The Model of Controlled 

IJif o^ra.aTion System 

The suggested model of the controlled information sys- 
tem is presented diagrammatically in Figure 3 on page 123. 
In this system data must meet certain standards before they 
are accepted into the system. Two channels are provided for 

the processing of data. Programmed manipulation of quanti- 

7 

tative data is carried out on the computer. Nonprogrammed 
manipulation of quantitative data and processing of non- 
quantitative data are handled manually (with or without the 
aid of some mechanical devices). Results of the two pro- 
cedures are combined by manual input into the computer and 
stored for reporting as output. However, before communica- 
tion to users, the information must also meet certain 
standards. The dynamic development of the system is 



6. Tribhowan N. Jain, "Liveware Approach to Informa- 
tion Design," unpublished paper, p. 2. 

7, Some nonquantitative data may also be processed by 
the computer, particularly for storage, indexing and 
retrieval . 



1. STANDARDS FOR INPUT 

2. DATA FOR MANUAL PROCESSING 

3. MANUAL PROCESSING (STORAGE, RETRIEVAL, 

MANIPULATION) 

4. DATA FOR COMPUTER PROCESSING 

5. COMPUTER PROCESSING (STORAGE, 

RETRIEVAL, MANIPULATION) 

6. COMBINATION 

7. INFORMATION AVAILABLE FOR REPORTING 

8. STANDARDS FOR OUTPUT 

9. DEVELOPMENT (FEEDBACK AND OPERATIONS 

RESEARCH) 



123 




124 

ensured by continuing operations research which utilizes 
feedback from users, persons controlling input and output, 
and persons manipulating data. New techniques and procedures 
developed on the basis of such research are added to, or 
modify, the existing techniques and procedures. Users of 
information may receive some information either directly 
from the sources of data or through other channels and may 
also contribute to the data input of the system. The vari- 
ous elements of this system are described below in some 
detail. 

Input Subsystem 

It was indicated in Chapter II that the input to an 
information system is data. Data are defined in this study 
as symbolic representations of some real \v'orld state or 
event which when communicated to an individual add to his 
knowledge. It has also been stated that data may be of 
various types, such as internal, external, quantitative, 

o 

nonquantitative , past, present or projected. 

The responsibility of the input subsystem of the con- 
trolled information system will be to decide what data to 
accept into the system. One guideline for this purpose 
would be the type of data being currently used. But there 
may be some new type of data which has the potentiality of 
being used in the future, and should, therefore, be accepted 



8. See p. 41. 



125 



into the system. This will require exercise of subjective 
judgment. Moreover, when some such data are observed, a 
feedback should be made to the developmental subsystem so 
that adequate consideration may be given to their use in 
the system. Such feedback must include not only the descrip- 
tion of the new type of data, but also the reasons why and 
how such data may conceivably be used. Changes in the 
nature of data collected on a routine basis should also be 
similarly dealt with. 

Reliability of input is a precondition to the relia- 
bility of output of the system. It was indicated in Chapter 

III that accountants take great care to ensure that only 

9 

reliable input enters the accounting system. On the other 
hand, while systems specialists in management information 
systems seem to have considerable concern for the accuracy 
of data, they generally do not consider other aspects of their 
reliability . Reliability of data may be defined as the 
certainty that the data correspond with the real world state 
or event they seek to represent. Reliability may be thought 
of as a continuum, and data available may have various 
levels of reliability. It is suggested that several levels 
of reliability may be specified, and all data accepted into 
the system should be categorized accordingly. A record 



9. See pp. 61-62. 
10. See pp. 88-89. 



126 



should be kept of the reliability level of data being used 
in the development of information , and , if appropriate pro- 
cedures have been used, such information should also be 
considered to have the same reliability level. If several 
categories of data are used in the development of a particu- 
lar piece of information, the reliability level of such 
information will be the same as that of the data with the 
lowest reliability level used in the process. For routine 
and repetitive data, it is possible to establish standard 
rules or procedures to categorize them according to their 
level of reliability. But for other types of data, the 
reliability level of each item must be determined individu- 
ally. In such cases, rules may be laid down for general 
guidance. But for truly exceptional items, the person in 
charge of the input subsystem will have to make a decision 
about their reliability level, which in turn may require 
consultation with the other systems of the organization. 

Data entering into the system should be properly 
authorized. For internal and routine data the authorization 
may be in the form of appropriate validation or verification. 
External data and projected data often may not be verifiable 
and should, therefore, be expressly authorized to enter into 
the system. The question as to which particular person 

11. An example would be the projection of national in- 
come over the next several years which may be required as 
input into the model building programs of the organization. 
A number of predictions are made by economists and others 
regarding the expected amounts of national income. Which 



127 



should authorize the data entry is a matter of managerial 
hierarchy of the organization. 

To summarize, the functions of the input subsystem will 
be to accept all data which may conceivably be used in the 
system and which have been properly authorized, to determine 
their level of reliability, and to make feedback to the 
developmental subsystem when necessary. Some of these func- 
tions will require exercise of subjective judgment of the 
person in charge of the subsystem. 

Processing Subsystem 

The processing subsystem will be responsible for the 

storage, retrieval, and manipulation of the data accepted 

into the system. It will be subdivided into two sections. 

One section will use the computer to carry out these tasks 

This section will be concerned with quantitative data and 

its manipulation in accordance with programs which form part 

12 

of the subsystem. The second section will be concerned 
with nonquantitative data and with nonprogrammed manipula- 
tion of quantitative data. This section will be operated 
by people who may or may not utilize mechanical devices. 
Because of the inherent flexibility of human beings, this 
section will lend a certain amount of flexibility to the 



particular figure should be used in the information system 
of the organization is a matter of some importance and 
should receive appropriate consideration. 

12. See footnote #7, p. 121. 



128 



information system as a vvhole. For instance, if some new 
tyne of data becomes available to the system, it may be 
processed manually by this section pending the development 
of appronriate computer programs. This section will also 
follow standardized techniques and procedures, or general 
guidelines, in its processing activities. The results of 
the manipulations by the two sections must be combined 
before the information developed is considered ready for 
reporting to users. This may be done by manual input into 
the computer. 

The computer programs, techniques and procedures, and 
general guidelines used in the processing subsystem are laid 
down when the information system is originally set up. Sub- 
sequently, these may be added to or modified by the develop- 
mental subsystem as and when considered necessary. There 
would be continuous interaction between the processing sub- 
system and the developmental subsystem. People in the 
former should provide feedback about any difficulty in the 
processing and also make suggestions for improvement. 

The procedures and techniques used in the system should 
be compatible with the requirements of the users, particu- 
larly with respect to the level of sophistication and 

13. The manual input may consist of information which 
should be reported along with the information developed by 
the computer, or it may specify the format in which the 
computer-processed information should be reported. The com- 
puter program may contain instructions that further proces- 
sing, or reporting of the output, should be carried out only 
if some manual input has been received at a particular stage 
and in a particular form. 



129 



understandability of the information developed. Many of the 
techniques of scientific management will be incorporated in 
the system, and the processing v/ill include model building 
and programmed decision making. The use of such techniques 
will enable the system to be helpful in problem solving at 
the higher levels of management. 

As far as possible, the processing should be carried 
out in an integrated manner. Data once entering into the 
system should be used to develop or update various types of 
information including financial, personnel, logistics, 
marketing and so on. 

Output Subsystem 

Responsibilities of the output subsystem are to ensure 
that: (1) information of the correct reliability level is 
supplied to a particular user or for a particular purpose; 

(2) only the information actually needed is reported; and 

(3) only properly authorized information is communicated to 
people who are authorized to receive the same. The problem 
of reliability of information is similar to the problem of 
reliability of input data. Information will be subdivided 
into several classes in accordance with the lowest level of 
the reliability of data used in its development. These 
classes will need to be related to the purnoses for which, 
or to the persons for whom, the information is supplied. 

In regard to the second aspect of output control -- 
reporting only the information actually needed -- information 



1.30 

requirements of users must be known with some precision, -k 
Several problems may arise in ascertaining such needs, 
particularly when the information is for use in decision 
making. The decision situation may not be well structured 
with the result that the information required in making the 
decision may not be specified. Even where structuring is 
possible, the decision model in use might not be explicitly 
stated. This may occur either because the decision maker 
is not clear about his own decision making process, or 
because no attemnt has been made to formalize the model. 
In such case also, the information required to make a deci- 
sion would be difficult to ascertain. Different decision 
makers might use different information in similar decision 
situations because of differences in their decision models, 
or in the relative importance given by them to the various 
types of information, or in their subjective knowledge. It 
is thus extremely difficult to achieve the ideal of provid- 
ing custom-made information for each individual decision 
maker and for each individual decision. To the extent that 
information reporting is not standardized and users have 
made no specification of their information needs, the person 
in charge of the output subsystem must use his judgment to 
determine what information should be provided to whom. In 
order to be able to do this effectively, he would need to 
be familiar with the operations of the business, the decision 
areas, and the controllable and noncontrollable variables 
that have an impact on the situation. 



131 



The information system should not provide information 
indiscriminately to anybody who may want or need it. From 
the point of view of the organization as a whole, it may 
sometimes be necessary to withhold some information from 
certain users. This would be particularly true in connection 
with the people at lower rungs of managerial hierarchy and 
those outside of the organization. Therefore, the output 
subsystem must communicate only authorized information to 
users who are authorized to receive the same. 

Where interactive devices are in use, enabling the 
users to retrieve information directly from the system, the 
problem of output control is less formidable. Since the 
decision maker has to specify the exact information he needs, 
only the information to be actually used is supplied to him. 
The already established relationships ensure compliance with 
the requirement of appropriate reliability levels of infor- 
mation to be provided to particular users. Similarly, use 
of such techniques as code words precludes the possibility 
of giving out information to unauthorized people. 

The output subsystem will be in constant contact with 
users of information and their needs. It may help the 
developmental subsystem by providing feedback about the ■ 
information actually needed but not being supplied, informa- 
tion being provided but not used, and changes in the infor- 
mation needs. 



132 



Developmental Subsystem 

This subsystem may be divided into two sections: one 
receiving and interpreting the feedback and the other carry- 
ing out operations research, and developing or modifying 
procedures and programs used by the processing subsystem. 
Both of these functions must be carried out by men. The 
feedback section indicates the areas in which development 
is needed, and the research section carries out the search 
for new or better procedures and programs. The work per- 
formed by the developmental subsystem may be considered to 
be an extension of the work done when the information system 
was originally established. Even where the expansion of the 
scope of the information system is not envisaged, the major 
role of this subsystem is to maintain the information system 
in keeping with changing needs of users. Furthermore, this 
subsystem will make continuing efforts to refine the exist- 
ing techniques and procedures so as to make the information 
system increasingly more useful to the organization. 

An important aspect of the introduction or modification 
of a procedure is a cost/benefit analysis of such a proced- 
ure. While it may be comparatively easy to determine the 
cost of introducing or modifying the procedure, it will be 
extremely difficult to assess the benefits in terms of money. 
Two types of cost/benefit analyses may be required for the 
success of the system. The total cost of the system should 
be related to the total benefits received from the same. 



133 



This may be necessary befoie the initial establishment and 
any subsequent expansion of the system. For introduction 
or modification of particular procedures, an incremental 
cost/benefit analysis would be called for. 

Specialized Skill Requirements 

For the successful operation of the information system 
suggested in this chapter, it will be necessary to have 
people with skills in the following specialized areas. 

Information control .- -People who can control the input 
and output of the system, process nonquantitative data and 
nonprogrammed aspects of quantitative data, combine the 
manually processed information with computer-processed 
information, and receive and interpret the feedback. The 
basic skill necessary for such people will be an understand- 
ing of the information needs of various users of information 
and relating these back to the sources of data. This, in 
turn, will require a familiarity with the operations of the 
business and its environment. Information controllers should 
be able to look at the organization as a whole, relate the 
information needs of various users on a comparative basis, 
and evaluate costs and benefits in financial terms. In 
accordance with the present state of knowledge, the only 
common denominator of information needed and utilized by 
various users is money, and, therefore, an understanding of 



134 



the financial aspects of information will be necessary for 
information controllers. 

Computer operations .- -People who can program, operate 
and maintain computers and other related devices, and can 
manage the data base and the programs library. 

Operations research . - -People who can develop and im- 
prove the techniques and procedures used in the system. 
This will involve basically an understanding of the various 
relationships in operations and of the decision making pro- 
cesses and an ability to make mathematical models. The 
methods of operations research may be used to achieve this 
end. , 

It has been observed in Chapter IV that the principal 
components of management information systems are the computer 
and operations research methods. Their roles were discussed 
there in some detail."'"'^ In the controlled information sys- 
tem suggested in this chapter, similar roles are assigned to 
them. The function of information control is newly intro- 
duced, and it is suggested that this be performed by members 
of a distinct discipline. Further consideration will be 
given to this matter in Chapter VI. 



14. See pp. 93-99. 



135 

Anticipated Problems * 

. ^ — ■■ - , — — 

Certain basic causes of the deficiencies of MIS were 
mentioned in Chapter IV. "'^^ In the suggested model of the 
controlled information system these causes have been elimi- 
nated, and hence it should not suffer from such deficien- 
cies. An effective integration of man/machine elements 
would have a mutually reinforcing effect and remove the 
limitations of both. The information controller would serve 
as the communication link with the users, and it will be his 
responsibility to ensure that only usable information is 
supplied to them. Several difficulties may, however, be 
anticipated in the operation of the suggested model. These 
difficulties and the ways to overcome them are discussed 
below. 

Feasibility of the Discipline 
of Information Control 

One of the points repeatedly made in this study is that 
an individual can not ordinarily fully acquire expertise in 
several disparate areas. For information control the exper- 
tise to be developed will principally be an understanding of 
the information needs of the various users and relating them 
back to the sources of data. Control of the input and out- 
put, integration of computer-processed and manually pro- 
cessed information, and interpretation of feedback are multi- 
dimensional applications of this expertise. 

15. See p. 106. 



136 



There will be numerous interfaces between information 
control and the other two elements of the system -- the 
computer and operations research. Interface with the com- 
puter will occur at the point of data entry, integration of 
manually processed and computer-processed information and 
communication of information. Feedback will be used by 
operations research people, and the information controller 
may also be one of the participants in the operations 
research team. These interfaces will necessitate a general 
familiarity with these elements, but the information con- 
troller need not be an expert in these areas. Similarly, 
it will also be necessary for the information controller to 
be generally familiar with the operations of the business, 
but he need not be an expert in the functional areas. In 
view of these observations, it seems that the training and 
education of a person as an information controller should 
not present any insurmountable difficulties. 

Communication Gap Between Systems People 
and Decision Makers 

Under the controlled information system, the systems 

people will include the information controller who will be 

familiar with the operations and information needs of the 

business and should be able to communicate with the decision 

makers. He will also be familiar with the computer and 

operations research, enough so as to be able to communicate 

with the experts in these fields. Thus the information 



137 

controller will serve as a communication link between the 
functional managers and other systems experts. 

Time Dimension of the System 

It has been mentioned earlier that for routine and 
repetitive matters , standard procedures and rules may be laid 
down for input acceptance and output reporting. These should 
be designed and implemented in such a way that the time 
dimension of the system is not disturbed. For other types 
of information, some time will be used up, particularly at 
the stage of input control. But in such cases, generally, 
the time dimension is not expected to be a critical factor. 
Furthermore, concern is expressed in the literature as to 
the desirability of placing all the information on an on- 
line real-time basis. '''^ The adoption of the system suggested 
in this chapter may present one additional constraint on the 
use of the on-line real-time facility. It will, however, 
not prevent such use. 

Controlled Information System and 
Total Systems ConcepT 

It has been stated earlier that the controlled informa- 
tion system will have the capability to develop all types of 

16. For example, see John Dearden, "Myth of Real-Time 
Management Information," Harvard Busines s Review, XLIV 
(May-June, 1966), pp. 123-1321 

Edward M. Tolliver, "Myths of Data Automation," 
Journal of Systems Management , XXI (August, 1970), p. 37. 



138 



information and supply the same to the various users, both 
internal and external. This may be taken as an indication 
that the objective of the proposed system is to develop and 
supply all such information and qualify to be described as 
a total information system. It was noted in Chapter IV that 
the concept of total information is not considered to be an 
achievable objective, and in fact the idea of supplying the 
totality of information is sometimes seen as ridiculous. 
In view of this background, the purpose of the controlled 
information system needs to be further explained. 

Under the concepts used in this study, an information 
system is needed (or is indeed possible) only in an organi- 
zation which can be subdivided into a decision making sys- 
tem, an operations system, and an information system on the 
basis of functional specialization. If specialized skills 
are not found necessary to carry out these functions in an 
organization, then that organization does not require the 
establishment of a controlled information system. An 
example would be a one-man business in which the same person 
makes all the decisions, carries out all the operations, and 
handles all the information. It is argued here that if it 
were possible to establish a total information system in an 
organization, its information system and decision making 
system would not remain separate but would merge into one 
system. The basis for this argument is that the inputs to 
the decision making system are: information, subjective 



139 



knowledge, and subjective judgment. The last two (subjec- 
tive knowledge and subjective judgment) may be substituted 
for by information -- information about the problem situa- 
tions, available alternative courses of action and their 
expected consequences, and previously laid out rules and 
procedures. When the totality of information is available 
from the information system, the decision maker will not 
need to use his direct observations or other sources of 
knowledge (which constitute his subjective knowledge), nor 
will there be any undefined rules or procedures or any 

missing information (which require the use of subjective 
1 7 

judgment). In such an instance, all decision making will 
become programmed decision making, which is considered to be 
a part of the information system. This would, however, 
require predetermination of all possible decision situations 
and the decision rules or models to be followed in each of 
them and a mechanism to collect all the information neces- 
sary for making the decisions. Since the internal and 
external environment of a business organization is suscepti- 
ble to continuous, and often unexpected, change, such pre- 
dictions may be considered to be impossible; Hence, the 
establishment of total information systems would also be an 
impossibility. 

However, all information systems, particularly computer- 
based information systems, are making progress toward 



17. See pp. 33-34. 



140 



developing and supplying more and more information and are 
utilizing problem solving and programmed decision making 
techniques to an ever- increasing degree. Thus, the ulti- .. 
mate aim of such systems is the total information system, 
even though the achievement of that end is an impossibility. 
This observation applies also to the model of the con- 
trolled information system developed in this study. Thus, 
while a controlled information system will have the capacity 
to develop and communicate all types of information, and 
will encompass in its scope more and more information, it 
will never achieve the status of a total information system. 

Evaluation of Controlled Information System 

j 

Criteria of a Good Information System 

At the outset of this chapter certain characteristics 
of a good information system v^;ere mentioned, and it was 
indicated that these could be used as criteria in evaluating 
the soundness of such a system. The model of the con- 
trolled information system is evaluated below in terms of 
these characteristics. 

Capability to develop various types of information . - - 
The controlled information system will have the required 
capacity to accept and process all types of data. The two 
channels within the system will be able to handle both quan- 
titative and nonquantitative data and to utilize both pro- 
grammed and nonprogrammed procedures. 



141 



Capability to coinmunicate the required information . - - 
The control of the output of the system aims at providing 
only the information actually needed by users. The feedback 
mechanism is provided to keep in constant touch with such 
needs. The information controller will have to use his 
judgment in supplying information where the information 
requirements can not be known precisely. 

Flexibil ity . - -The duality of the processing channels 
and the provision of manual input into the computer before 
a piece of information is considered to be ready for report- 
ing will enable the system to have a sufficient degree of 
flexibility to change in keeping with the changing environ- 
ment. ^vTien computer programs can not be revised or added 
to in appropriate time to carry out the modified, or newly 
required, procedures, such procedures may be temporarily 
performed by the information controller manually, and the 
results thereof combined with the other information devel- 
oped by the computer. 

■ Feasibility .- -There does not seem to be any technical 
problem in giving effect to the suggested model of the con- 
trolled information system. Economic feasibility depends 
largely on the measurement of the costs and benefits aris- 
ing because of the introduction of the system. The develop- 
mental subsystem of the suggested model is required to carry 
out the cost/benefit analysis before any changes or addi- 
tions are made. Hence, the system as a whole should be 
fully feasible at all times. 



142 



Dearden's Five Questions 

In a recent article, Dearden raised serious doubts 

1 8 

about the very concept of management information systems. 
He put five questions which, in his view, the proponents of 
MIS ought to ask themselves. The suggested model of the 
controlled information system is examined below in the 
light of these questions. 

"IVhich information systems are to be included in the 
MIS?" - -Under the concept of the controlled information sys- 
tem, there will not be several information systems, but only 
one integrated system. This will cover all the information 
which is developed from the data arising within, or received 
from outside, the organization and communicated to the 
decision making and operations systems of the organization 
and to people outside the organization in accordance with 
their needs and authority. Personal knowledge and judgment 
of the executives of the organization do not make part of 
the information system unless they are formally entered into 
the system after having met the standards of input acceptance. 
The controlled information system will employ not only the 
procedures similar to those used by accounting and other 
traditional information systems but also such advanced tech- 
niques as model building, programmed decision making, and 
problem solving. There are no constraints on the types of 

18. John Dearden, "MIS Is a Mirage," Harvard Business 
Review , L (January-February, 1972), p. 99."" 



143 



data that may be accepted into the system or on the types 
of information that may be developed. 

"\Vhat kinds of experts are to be included in an MIS 
group, and what training shall they have ?" - -Three types of 
expertise are required for the operation of the controlled 
information system: information control, computer opera- 
tions, and operations research. Some details of these 
three areas have been indicated earlier. 

"Ifliere is this group to fit into the corporate organi - 
zation? In particular, \v^hat \Nfill happen to the staff groups 
from the controller's office, the legal department, the 
marketing research department, and so forth?" - -The controlled 
information system will have a distinct organization of its 
own and will be under the jurisdiction of a senior executive. 
Its task will consist only of developing and supplying infor- 
mation. Except in unusual circumstances, the staff groups 
which presently perform this function will no longer be 
required after the establishment of the controlled informa- 
tion system. The controller (and his staff) may be expected 
to serve as the information controller in the new set up.''"^ 
However, the noninf ormational functions usually carried out 
by the controller, such as financial management and taxation, 
would be entrusted to people with requisite expertise. Other 
staff groups, such as the legal department and the marketing 

19. Further consideration will be given to this matter 
in Chapter VI. 



144 



research departments, v;hich have different skill require- 
ments than those for the information function, will retain 
their present positions. -r 

"What authority is the MIS group to have? Is it t o 
have authority to design and implement systems, or is it 
to serve in an advisory function only?" --The group of ex- 
perts as envisaged in the suggested model of the controlled 
information system will be responsible for the operations 
of the system. The original design of the system may be 
developed by a larger group which would include people from 
the various other functional and managerial areas. 

"What can this group accomplish that cannot be better 
accomplished by placing information specialists under func - 
tional groups?" --Placing information specialists under func- 
tional groups will lead to the fractional ization of the 
system, the disadvantages of which were indicated earlier. 
The suggested model of the controlled information system 
will further the use of modern techniques of model building, 
problem solving, and programmed decision making, which is 
not possible in a fractional i zed system. 

Summary of the Chapter 

In view of the purpose of the information system of a 
business organization and in order to avoid the deficiencies 



20. See p. 113. 



145 



observed in the operations of accounting and management 
information systems, a good information system should 
possess the following characteristics: capability to develop 
various types of information, capability to communicate the 
required information, flexibility, and feasibility. To 
acquire these characteristics such a system needs to be a 
man/machine system in which man is integrated as an essen- 
tial element. It was suggested that the model of the con- 
trolled information system meets these objectives. In this 
model, the input (data) and output (information) of the sys- 
tem must meet certain standards (usability, reliability and 
authority). Two channels are provided for processing the 
data -- one on the computer and the other manually. The 
developmental subsystem receives feedback from users of 
information and the other subsystems of the system; it 
develops and modifies the techniques and procedures used in 
processing. The operation of this model will need people 
with specialized skills in three areas: information control, 
computer operations, and operations research. The functions 
of information control will consist of the control of input 
and output, manual processing of data, and receiving and 
interpreting of feedback and will be carried out by members 
of a distinct discipline. Though the system will have the 
capacity to develop and communicate all types of information, 
it will not achieve the status of the total information sys- 
tem. The model of the controlled information system was 



146 



evaluated in two v,'ays: it ^^^as appraised on the basis o£ 
the criteria developed in this chapter and also on the basis 
of criteria- like questions posed by Dearden. In either in- 
stance, the system apparently scores well.. 



CHAPTER VT 

TFIE SUGGESTED ROLE OF ACCOUNTING :. 
IN CONTROLLED INFORMATION SYSTEMS ■ 

Purpose and Organization of the Chapter 

It was suggested in Chapter V that in a controlled 
information system the function of information control may 
be performed by the controller and his staff. The purpose 
of this chapter is to explore this suggestion further and 
to study its implications, particularly as regards the 
education and training of accountants. 

This chapter will begin with a brief description and 
evaluation of the suggestions made in the literature regard- 
ing the role of accounting in computer-based management 
information systems. It will be shown why the function of 
information control is considered to be an appropriate role 
for an accountant. Implications of the suggested role as 
regards the education and training of accountants will then 
be investigated. Finally, certain suggestions will be made 
to help the accountant carry out the new tasks. 



147 



148 



Role of Accounting Suggested in Literature 

Accounting may have three possible positions in an 
organization : 

(1) It may be the sole or major information system. 
This position was studied in Chapter III, and it was found 
that accounting did not seem to be capable of adequately 
carrying , out this role in the modern environment. 

(2) It may serve as one of the several independent 
information systems of the organization. This situation 
was discussed in Chapter IV. Upon examination, it was found 
that the implementation of such a proposal would prevent 
the organization from taking advantage of many of the 
developments in computer technology and problem solving 
techniques. 

(3) It may serve as an integral part of management 
information systems. Suggestions made in the literature 
utilizing this idea are examined belov'/. 

Joplin"^ suggests that an accountant is a good choice 
to become the manager of MIS. The accountant should, how- 
ever, enlarge his scope to cover all information, whatever 
its use. He may perform a valuable function by incorporat- 
ing currently acceptable classification techniques (with 

1. Bruce Joplin, "Can the Accountant Manage EDP?" 
Management Accounting , XLIX (November, 1967), pp. 3-7; 

, "The Accountant's Role in Management 

Information Systems," Journal of Accountancy, CXXI (March. 
1966), pp. 43-46. ^ 



149 



which managers are familiar) into the system. He may be of 
great help in instituting proper controls, such as an ade- 
quate audit trail and control over confidential data. 
Joplin proposes specific functions for the accountant during 
the designing stage of MIS but does not clarify what his 
functions should be as the manager of MIS except that, 
because of his experience with the information system of 
the organization, he may have an adequate knowledge of its 
information needs. V/hat other functions the accountant may 
perform in the operation of MIS need to be further inves- 
tigated. 

2 

Gynther has suggested that the management accountant 
must carry out a role within the "total MIS/management 
science area" in association with other professionals who 
have a better grasp of many of the newer relevant techniques. 
His task would be to supply information (mainly of an eco- 
nomic nature) from the integrated information system for 
use in the various planning activities, decision making 
models, and for various control mechanisms. He would 
arrange for the necessary inputs to be made to the system, 
for the creation of necessary data files or banks, and for 
the installation of speedy retrieval systems. The specific 
functions suggested by Gynther for management accountants 
are somewhat vague. He seems to think that accountants 



2. Reg S. Gynther, "The Management Accountant of the 
Future," Accountant's Journal (New Zealand), LI (August, 
1972), pp. ^-11. 



150 



should be responsible for the input, storage, retrieval, 
and output with respect to the particular type of informa- 
tion and for certain identified purposes mentioned earlier. 
Presumably, the other professionals within the "total MIS/ 
management science area" would have similar responsibilities 
for information of other types or for other uses, and that 
the processing of all the information would be integrated 
in the computer. It seems that the adoption of this sugges- 
tion would prevent functional specialization within the 
"total MIS/management science area" and might lead to its 
fractionalization into several independent subsystems having 
as a link the use of computers for integrated processing of 

their data. >■ 

3 

Churchill and Stedry suggest that the routine proces- 
sing of data may be left to the computer, and that the 
accountant concentrate on its verification at the minute 
"bits" level, refinement of the objectivity criteria in 
these ne\\? terms, classification of the basic primitive trans- 
action, and quantification of events now accorded only quali- 
tative description. This suggestion seems to propose a 
fundamentally different role for accounting from what it has 
been traditionally carrying out, for, in order to accomplish 
it, accountants would have to develop expertise in ne\>^er 
areas. Should the accountants be able in fact to accomplish 

3. Neil C. Churchill and Andrew C. Stedry, "Extending 
the Dimensions of Accounting Measurement," Management Services, 
IV (March-April, 1967), p. 21. — 



151 

these functions, the advantages would relate to an assurance 
of reliability in the inputs to the system and to the 
dynamic development of the system. Other deficiencies, such 
as the overabundance of irrelevant information, observed in 
the operations of MIS would still remain unresolved. More- 
over, functions relating to the dynamic development of the 
system are presently discharged by operations research, and 
an incursion of this field by accounting might raise the 
problem of the selection of the most suitable person for the 
j ob . 

An Overall Evaluation of the Proposals 

From a perusal of the various proposals regarding the 
role of accounting within MIS, it seems that accountants are 
not quite clear in their own minds as to what functions 
should be discharged by accounting as an integral part of a 
computer-based information system. They seem unable to 
decide as to just how to utilize their specialized skill and 
expertise within such systems. 

Role of Accounting in 
Controlled Information Systems ' 

In contrast to the vagueness of the proposals found in 
the literature, the role suggested for accounting in the 
controlled information system is quite clear. It will con- 
sist of information control and participation in operations 
research. These functions can be carried out successfully 



152 



by members of the accounting discipline. The reason for 
this assertion is that the work traditionally performed by 
accountants includes tasks similar to these functions, and 
accountants have developed specialized skill and expertise 
in these areas. No otlier discipline seems to be better 
suited for this purpose. 

Control of Input ' 

In the suggested model of the controlled information 
system the functions of the input subsystem would be to 
accept all data which may conceivably be used by the system 
and which have been properly authorized, to determine their 
level of reliability, and to make feedback to the develop- 
mental subsystem when necessary. Some of these functions 
will require exercise of subjective judgment of the person 
in charge of the subsystem.^ 

The accountant has extensive training and background in 
data collection.^ Both quantitative and qualitative data 
are used in accounting and, before acceptance into the 
accounting system, they must meet appropriate qualitative 
standards, such as reliability.^ Expertise of accountants 



4. For further details of these functions, see pp. 
124-127. 

5. Joplin (1966) , p. 44. 

6. See pp. 61-62 .This situation is in sharp contrast to 
that obtained in management information systems. One of 
the deficiencies of such a system is an inadequate control 
over input. See p. 104. 



153 



in this field can be adopted in the information requirements 

•7 

presented by new management techniques. It is observed 
that in practice procedures for data collection followed in 
computer-based integrated information systems are similar 

o 

to those followed by controllers. It seems logical, there- 
fore, that accountants should carry out the task of input 
control in controlled information systems. 

In order to perform this function effectively, it would 
be necessary to expand the scope of the work which is pres- 
ently done by accountants. Input of the controlled informa- 
tion system consists of all types of data (such as quanti- 
tative, nonquantitative , internal, external, past, present 
or projected), while input of accounting is limited to reli- 
able financial data. The accountant would, therefore, need 
to acquire an understanding of various other types of data 
also. This requirement is in keeping with the current 
developments in accounting, and similar suggestions are also 
found in accounting literature. For example, Firmin has 
suggested that the scope of accounting may be broadened to 
include nonmonetary information, and the concept of "trans- 
action" may be revised to include data for immediate use and 



7. Neil C. Churchill and Andrew C. Stedry, "Some 
Developments in Management Science and Information Systems 
with Respect to Measurement in Accounting," in Research in 
Accounting Measurement , Eds. Robert K. Jaedicke, Yu j i Ijiri 
and Oswald Nielsen (American Accounting Association, 1966), 
p. 30 . 

8. Neil C. Churchill and Myron Uretsky, "Management 
Accounting Tomorrow," Management Accounting . L (June, 1969), 
p . 52 . 



154 

9 

for future use. The suggestion made by Churchill and 
Stedry referred to earlier is also consistent with the func- 
tion of input control. According to these authors, accoun- 
tants ought to be able to verify data at the level of minute 
data bits and to refine the objectivity criteria in these 
nevv terms .^^ 

A discussion of the various qualitative standards which 

the input to the controlled information system ought to meet 

1 1 

is contained in a later part of this chapter. 

Manual Processing of Data 

Two processing channels are contemplated in a con- 
trolled information system, one using the computer and the 
other relying upon the manual processing of data. Manual 
processing is included in the function of information con- 
trol. This would consist of procedures and techniques which 
can not be carried out on the computer. Characteristics 
which make certain operations suitable for being performed 

effectively and profitably on the computer were mentioned 
12 

in Chapter IV. Procedures and techniques which do not 



9. Peter A. Firmin, "The Potential of Accounting as 
a Management Information System," Management Internatio nal 
Review , VI (1966/2), pp. 49-53. ' 

10. Churchill and Stedry (1967), p. 21. 

11. See pp. 166-170. 

12. See p. 96. It may be noted also that one of the 
deficiencies of MIS is the exclusion of judgmental factors. 
See pp. 103-104. 



155 



possess these characteristics would be executed manually and 
would include those in which interacting variables do not 
have reasonably accurate values, those which are not repeti- 
tive, and those with small volumes of input and output. 
Operations requiring use of judgment would necessarily be 
carried out by human beings. 

Accountants have historically processed data manually 
using compatible mechanical devices as and when they became 
available. But the techniques and procedures used by them 
are confined to financial accounting and management account- 
ing and those utilized for certain noninf ormational func- 
tions. In the controlled information system the processing 
subsystem would employ various other techniques, such as 
model building, problem solving and programmed decision 
making, as well as procedures to develop nonfinancial infor- 
mation (such as that relating to personnel, logistics, market- 
ing and so on) . Even though such procedures and techniques 
would normally be carried out on the computer, an efficient 
information controller should acquire a basic understand- 
ing and general familiarity with them. It is expected 
that accountants can acquire such an understanding without 

any insurmountable difficulty, primarily because of the 

1 

general attitude developed by them toward their work. ^ They 
take a wholistic view of the organization, and the accounting 



13. See pp. 57-60. 



156 

system itself is considered to be a model thereof. Models 
of organization in other media (such as mathematics) should, 
therefore, be compatible vvrith their way of thinking. This 
would be further helped by the fact that accountants account 
primarily in financial terms; all states and events of 
interest to various users possess some financial aspects, 
and hence accountants come in contact with all or most of 
them. 

Manual processing of data would require the use of a 
certain amount of judgment, such as in the application of 
general guidelines in developing information or in the treat- 
ment of nonrepetitive items of data. Accountants make fre- 
quent use of judgment in their work"""^ and should be able to 
adapt their professional judgment to the needs of the con- 
trolled information systems. 

Computer-processed and manually processed information 
must be combined before being considered available for com- 
munication to users. This combination may be effected by 
manual input into the computer and should be done by the 
information controller. In accounting, similar combinations 
are frequently required. For example, financial statements 
contain both quantitative information and nonquantitative 
information, the latter often included in footnotes. Accoun- 
tants can perform this function in controlled information 



14. See pp. 60-61. 



157 



systems also; but this would necessitate a sufficient famil- 
iarity with the operations of the computer. 

Control of Output 

In the controlled information system, responsibilities 
of the output subsystem are to ensure that (1) information 
of the correct reliability level is supplied to a particular 
user or for a particular purpose, (2) only the information 
actually needed is reported, and (3) only properly author- 
ized information is communicated to people who are author- 
ized to receive the same."*"^ These functions are similar to 
those performed by apcountants with respect to accounting 
information.''"^ Accountants may, therefore, be expected to 
effectively control the output of the controlled information 
system. However, they would need to extend the area of 
their interest so as to encompass all types of information 
developed by such a system. The various qualitative stan- 
dards vv'hich the output of the controlled information system 
ought to meet are discussed in a latter part of this chapter. 

A common deficiency of accounting and MIS is the lack of 
a precise understanding of the information required by users. 



15. See p. 12 9. 

16. See pp. 62-64. On the other hand, several of the 
deficiencies of MIS relate to an inadequate control over 
output, such as an overabundance of irrelevant information 
and an incompatibility of sophisticated information with 
management capabilities. See pp. 100, 105-106. 

17. See pp. 166-170. 



158 



As indicated in Chapter V, the basic skill necessary for 
information control is an understanding of the information 
needs of various users and relating these back to sources 
of data. Though accountants do try to keep in touch with 
changes in such needs, they need to make a greater effort 
in this direction. In a later part of this chapter, 
certain guidelines are provided to ascertain the informa- 
tional requirements of decision makers which may be helpful 
in the performance of this function by accountants. 

Receipt and Interpretation of Feedback 

In the controlled information system, the developmental 
subsystem is divided into two sections: one receiving and 
interpreting the feedback and the other carrying out opera- 
tions research. Functions of the former section are in- 
cluded in information control and hence would be performed 
by accountants. Feedback is received from users, persons 
controlling input and output, and persons manipulating data. 
Since the functions of input and output control and the 
manual processing of data would be carried out by the infor- 
mation controller, feedback from these sources would be the 
utilization of his ovvn ideas arising in these areas. Feed- 
back from persons in charge of computer operations would 
relate mostly to technical matters, such as difficulties 
faced in processing and suggestions for improvements. 



18. See pp. 171-172. 



159 



Feedback from users would play the most important part in 

keeping the system consistent with user needs. 

As mentioned earlier, accountants try to keep in touch 

with changes in the information needs of users and make 

19 

necessary modifications in the accounting system. In con- 
trolled information systems, the making of any changes would 
be a difficult and costly affair; hence, great care must be 
taken in interpreting the feedback from users. Such feed- 
back may sometimes point out the necessity of educating 

users rather than making changes in the information system. 

20 

In a latter part of this chapter, certain guidelines are 
provided in regard to the feedback from users of information. 

These may help accountants in the discharge of this function. 

■ ' ■ ...^ • , * ' ' , ■ 

Participation in Operations Research 

In addition to the function of information control, it 

is suggested here that accountants may also participate in 

operations research in the developmental subsystem of the 

controlled information system. As defined in Chapter IV, 

operations research is the systematic study of the basic 

structure, characteristics, functions and relationships of 

an organization as well as the collective effort of many 

types of talent concentrating on the application of the sci- 

2 1 

entific method to the development of predictive models. 

19. See p. 64. 

20. See p. 170-171. 

21. See p. 97. 



160 



An information controller can make a contribution to opera- 
tions research in several areas. Since he would be familiar 
with the various operations and decision processes of the 
organization, he might occupy the ideal position with 
respect to identifying problems which ought to be solved by 
the operations research section. He would also be capable 
of building verbal models which may be translated into 
mathematical models by experts in the fields of mathematics 
and statistics. Because he attempts to keep in constant 
contact with users of information and receives feedback from 
them, he might be of great help in the solution control pro- 
cess, that is, in the detection of significant changes in 
parameter values which would necessitate a change in the 
decision rules. Furthermore, changes in the processing sub- 
system of the controlled information system would be made 
after an ' incremental cost/benefit analysis, and the informa- 
tion controller may contribute to an understanding of the 
financial implications of such changes. 

The functions of the information controller in opera- 
tions research suggested in the foregoing paragraph are 

similar to some of the functions suggested by Hartley for 
22 

accountants. To perform these functions, accountants 
would need to acquire sufficient familiarity with operations 
research to recognize its possible applications. 



22. Ronald V. Hartley, "Operations Research and Its 
Implications for the Accounting Profession," Accounting 
Review , XLIII (April, 1968), pp. 324-326. 



161 

l\Tio'll Be in Charge? ^ ^ 

A favorite theme of \vriters in accounting is to specu- 
late as to who should be in charge of the organization's 
computer-based information system, and most often the 
answer found by them is "the accountant" (with or without 
some qualifications).^'* In view of the fact that the func- 
tions of the various participants in the controlled informa- 
tion system have been specified in some detail, it does not 
seem necessary to find a definitive answer to this question. 
So long as they perform their designated roles effectively, 
any of the participants (information controllers, computer 
experts and operations research experts) may be the head of 
the system. However, the information controller would 
occupy a unique position in that he would be in touch with 
both the sources of data and users of information, and would 
have an understanding not only of the information system 
but also of the operations and decision processes of the - 
organization. Because of this, he may be considered to have 
an edge in his favor over the other participants to take 
charge of the system. 



23. This heading has been inspired by Robert Beyer's 
article: "Management Information Systems: \Vho'll Be in 
Charge?" Management Accounting , XLVIII (June, 1967), pp. 3-8. 

24. For a brief discussion and references, see pp. 4-5. 



162 



Implications for Accountants' 
Training and Educati"oTi 

Since accountants would work as information controllers 

and participate in operations research under the suggested 

model of the controlled information system, their education 

and training should emphasize the functions they would 

actually carry out. From this viewpoint, accounting as a 

discipline for information control should include a study 

25 

of the following matters. 

(1) Analysis of the information needs of decision 
makers and other users. This would involve a general famil- 
iarity with the operations of the business, decision areas, 
decision making processes , effects of alternative methods of 
processing or presenting information on decisions, and infor 
mation required to be reported under various laws and author 
itative rules and regulations (such as those of the Securi- 
ties and Exchange Commission, stock exchanges, and financial 
institutions). Levels of reliability of information to be 
provided to different users for different purposes and 
behavioral aspects of the supply and use of information 
would also need to be understood. 



25. No attempt has been made here to specify the mate- 
rial which may be borrowed from different fields of knowl- 
edge for the training and education of information control- 
lers. Since information control is expected to emerge as 
a distinct discipline, all such material should be devel- 
oped from its own viewpoint and ought to be well integrated. 



163 



(2) Understanding of the data needed to develop vari- 
ous types of information. This would involve a general 
familiarity with the techniques of processing data, knowl- 
edge of data sources within and outside the organization, 
and analysis of the reliability of various sources and of 
data provided by them. 

C3) Ability to carry out manual processing of data as 
may be needed and to combine sucli data with computer- 
processed information by manual input into the computer. 

(4) Familiarity with operations research sufficient to 
recognize its potential, its limitations, and possible 
applications . 

(5) Familiarity with computers sufficient to understand 
their potential, their limitations, and possible applica- 
tions . ' > ... 

Training and education which help accountants primarily 
in the discharge of other functions should be de-emphasized. 
This would include the routine processing of quantitative 
information and the noninf ormational functions traditionally 
carried out by accountants. Giving up of the noninf ormational 
functions is important because information controllers have 
to remain without any departmental or functional bias. How- 
ever, an expertise in the financial aspects of states and 
events would continue to be useful and should receive suffi- 
cient attention. 



164 



In addition to specialized skills, information con- 
trollers would need an appropriate attitude toward their 
work. Two important aspects of this attitude would be: 

(1) the taking of a wholistic view of the organization and 

(2) a disinterestedness in the information developed. 

Some Standards and Guidelines 

t 

2 6 

Standards for Data and Information 

In the controlled information system, data and infor- 
mation must meet certain standards before they can be 

accepted into the system or reported to users. A brief dis- 

27 

cussion of these standards is contained in Chapter V. 
Many references are found in literature about similar 
standards or qualitative objectives, and there appears to 
be no unanimity of opinion among the various writers in 
regard to them. In view of such diversity of ideas, a 
further consideration of the standards advocated in this 
study seems to be called for. 

The following standards or qualitative objectives have 



26. Before the preparation of this section, a brief 
reference was made to certain draft notes of the proceedings 
of American Accounting Association's Committee on Concepts 
and Standards -- Internal Planning and Control, 1972-73. 
These notes were made available by Professor Lawrence J. 
Benninger, a member of the Committee, and were helpful in 
the crystallization of ideas contained in this section. 

27. See pp. 126-127 and 129-131. 



165 



been suggested by various writers:'' 
Accuracy 

Adequate disclosure 
..Clarity 
Comparabil ity 
Completeness 
Conciseness 
Consistency 
Correspondence 

Economic feasibility .. 

Freedom from bias 

Meaningfulness 
^ Neutrality 

Objectivity 
: Quant if lability 
'. Realism 

Reliability 

Relevance 

■ Sensitivity . - - ' 

' Significance 

Sufficiency 
. Timeliness 

Underst andabil.ity 

Uniformity 

Usefulness 

Validity 

Verif lability . 

Several authors have arranged the qualities specified by 
them in hierarchical order -- where some qualities are con- 
sidered to be more important than the others, or where qual- 
ities of a lower order are supposed to lead to the attain- 
ment of qualities of a higher level. Furthermore, in 
several schemes substitution or trade-off among the suggested 
standards is also permitted. 

From a perusal of the various objectives listed in the 
foregoing paragraph, it appears that while most of them do 



28. This list has been prepared from a survey of the 

literature in accounting and systems analysis and is believed 

to be fairly comprehensive. Several of the items appear to 

express identical or closely related ideas. 



166 



represent the qualities that information ought to possess, 
there are some which are either undesirable or not inherent 
in the information as such. In terms of the scheme followed 
in this study, the various desirable qualities are included 
as follows : ■ 

Characteristics of the information system . --An efficient 
information system should have the capability to develop 
various types of information and to communicate them in 
accordance with users' requirements. It is the responsi- 
bility of the information system to supply complete or ade- 
quate information on a timely basis. Adequacy and timeliness 
thus need not be considered to be the properties of informa- 
tion as such. Similarly, an information system should be 
technically and economically feasible, and economic feasi- 
bility need not be related directly with individual items of 
information. 

Specialized skill and expertise of information control - 
lers . - - In addition to technical skill, information control- 
lers must develop a certain attitude toward their work which 
includes a disinterestedness in the information supplied. 
Such an attitude would make it possible to develop informa- 
tion which is free from bias. 

Standards for input and output .- -Three standards have 
been suggested in this study with regard to both data and 
information. They are: reliability, usability and author- 
ity. Reliability is considered to be one of the higher 



167 

29 

level qualities by some writers. Several of the other 
qualities mentioned in the literature lead to reliable 
information; in particular, verif iability , objectivity, 
accuracy, and correspondence. Realism suggests that there 
could be several levels of reliability, and not all informa- 
tion can or needs to attain the highest level. 

Usability means the potentiality of being used by the 
recipient. In the case of data, this indicates that they 
could be used in accordance with the techniques and proced- 
ures being followed currently or which may be reasonably 
expected to be adopted in the future. For information this 
implies that the information is needed by the user for some 
specific purpose, for example, it would be an input to his 
decision model; is understood by him; and is in keeping with 
his level of sophistication. Several of the qualities 
listed earlier would lead to usability of information, in 
particular, uniformity, consistency, unders tandability , 
meaningfulness , significance and sensitivity. The term 
"usability" has been employed in this study in preference 
to the more popular term "relevance" because of two reasons. 
Firstly, usability is a broader term than relevance (though 
not so broad as to be vague or imprecise, as is the case 



29. For example see Accounting Principles Board, 
Statement #4, Basic Concepts and Accounting Principles 
Underlying Financial Statements of Business Enterprises 
(New York: American Institute of Certified Public Accoun- 
tants, 1970), paragraphs 77 and 107. 



168 



with "usefulness"). Secondly, usability does not indicate 
the suggestion o£ a prior commitment on the part of the 
information supplier to a particular course of action or a 
particular result, which is sometimes implied in explana- 
tions of the concept of relevance. 

It appears that in the literature authori ty (or author- 
ization) is not considered to be a necessary quality of 

information. However, references to it are found in some 

31 

of the writings. It seems that the concept of authority 
marks one of the differences between theoretical desirability 
and practical availability of information. Since this study 
is concerned with developing an operational model of the 
information system, authority is considered to be one of 
the essential characteristics of information. 



30. For example, see the definition of relevance in 
A Statement of Basic Accounting Theory (Evanston, 111.: 
American Accounting Association, 1966, p. 9): "For infor- 
mation to meet the standard of relevance, it must bear upon 
or be usefully associated with the action it is designed 

to facilitate or the result it is desired to produce." 

31. For example, see Louis Goldberg, An Inquiry Into the 
Nature of Accounting (American Accounting Association, 
1965) . On p. 55 he states : ". . . the purpose of account- 
ing reports, it would seem, is to inform persons entitled 

to information." [Emphasis added ]; 

A similar idea is expressed by American Accounting 
Association's Committee on External Reporting: "The social 
interests may be served by permitting the withholding of 
relevant information in those cases where it would not be 
in the public interest to make full disclosure even though 
such withholding might make the reports biased or lacking 
in relevant data. For example, the disclosure of certain 
information night give competitors an undue advantage or it 
might be in conflict with public security requirements." 
See "An Evaluation of External Reporting Practices: A 
Report of the 1966-68 Committee on External Reporting," 
Accounting Review, Supplement to Volume XLIV (1969), p. 96. 



169 

There does not seem to be any reason why quantifia- 
bility and conciseness should be considered to be among the 
necessary attributes of information. Quantif lability does 
add to the usefulness of information, but this does not 
imply that nonquant if iable information is always useless 
and should not be provided. Similarly, if information 
possesses other essential qualities, it need not necessarily 
be concise. However, the information system has the respon- 
sibility to ensure that no unnecessary information is sup- 
plied to users. 

There is no trade-off among the standards suggested in 
this study in the sense that one can be substituted for 
another, or that an increase in the adherence to one can 
compensate for a decrease in the compliance with another. 
Adherence to these standards in different degrees may make 
information suitable for reporting for. different purposes 
or to different users. In particular, reliability may be 
considered as a continuum, and it was suggested earlier that 
several levels of reliability may be fixed for categorizing 
data and information. A possible scheme of such categori- 
zation could be as follows: 

Category I -- Information with the highest reliability. 
This would include information that has been validated by 
competent physical verification. 

Category II -- Highly reliable information. This would 
include information that has been verified by means of a 
cross check against other independent information. 



170 

Category ITT -- Reliable information. This would in- 
clude information which has not been independently verified 
but has been received from competent sources and has internal 
validity. 

Category IV -- Information with low reliability. This 
would include information that is not verifiable (such as 
expectations about the future) but has been received from 
competent experts. 

Category V -- Information with the least reliability. 
This would include unverifiable information received from 
nonexperts (such as layman's guesses about the future). 

Guidelines for Receiving Feedback from Users 

The concept of feedback has been used in the literature 
mostly in the technical sense of a statement of differences 
between actual occurrences and pre-set standards for pur- 
poses of control. In this study, however, it is used in 
the broader sense of users' reactions to the information 
system in general and to any particular information. It is 
suggested that the controller of information make efforts to 
receive feedback from recipients of information with respect 
to the following matters; 



32. An item of general interest would be the future 
plans of an organization. In the sense of a prediction 
about the future, they might be considered to have low, or 
the least, reliability. But in the sense of a decision 
made by appropriate officials of the organization, they 
might be considered to have high, or the highest, relia- 
bility. 



171 



(1) Differences between information supplied by the 
information system and direct observations made by users in 
regard to the real world state or event represented by that 
information. 

(2) Differences betvv-een information supplied by the 
information system and information received by users from 
other sources and an indication as to which of them was con- 
sidered, or found to be, more reliable by the users. 

(3) Information supplied by the information system but 
not actually used by recipients. 

(4) Information, or particular aspects of it, not sup- 
plied by the information system but actually needed by 
persons authorized to receive such information. 

Guidelines for Analyzing Information Needs 

Information needs of the decision making system may 

be ascertained in many ways. One of the ways to analyze 

such needs which is of particular use in the controlled 

33 

information systems is briefly described below. 

The first step would be to prepare an operations flow 
chart. This chart would indicate the physical flow of money, 
materials, and services required in the performance of the 

33. A practice frequently adopted by writers in this 
regard is to specify a set of questions which may be asked 
of decision makers. However, the method suggested in this 
section may be expected to lead to a deeper and more compre- 
hensive understanding of the information needs. Somewhat 
similar methods have been suggested by some authors, such 
as the data netv^^ork analysis of A. F. Moravec, "Basic Con- 
cepts for Designing a Fundamental Information System," 
Management Services , II (July- August , 1965), pp. 41-45. 



172 



operations of a business. It should be prepared in such a 
way as to indicate the decision areas, that is, the points 
where alternative courses of action are actually available. 
The second step would be to analyze and understand the deci- 
sion making process followed by the persons who decide upon 
the particular course of action to be adopted. It is, how- 
ever, not essential that the exact decision model be known 
(which would be the case when the decision making itself 
had to be programmed) ; a general indication of the factors 
taken into consideration while making the decisions may be 
sufficient for the purpose of ascertaining the information 
needs. The hierarchy of objectives and goals of the organi- 
zation and its operations subsystem, constraints placed by 
the environment and internal conditions, and criteria of 
success would normally be taken into account in decision 
making. The last step would be to specify the information 
actually needed. All types of information should be con- 
sidered, such as quantitative, qualitative, and so on. 
Besides the information supplied by the information system, 
the decision makers may also use their own knowledge and 
direct observations, information received from other sources, 
and subjective judgment where no adequate information is 
available. A clear understanding of these will greatly 
help in the development of the information system. 



173 



Summary of the Chapter 

Several suggestions have been made in the literature 
regarding the role of accounting in computer-based informa- 
tion systems. They are, in general, rather vague, and it 
appears that accountants are still looking for a proper 
place in this new setting. The role recommended here for 
accounting in controlled information systems is quite clear. 
It would consist of information control and participation in 
operations research. This role has been suggested for 
accountants because the functions involved in it are similar 
to those traditionally carried out by them. Functions 
included in information control consist of the control of 
input, manual processing of data, control of output, and 
receipt and interpretation of feedback. In order to perform 
these tasks effectively, accountants should expand the scope 
of their expertise beyond financial information to cover all 
types of information. In operations research, they may help 
in the identification of problems requiring solution and 
the making of verbal models, as well as in the solution 
control process and cost/benefit analysis. 

The education and training of accountants should empha- 
size an analysis of users' information needs, an understand- 
ing of data needed to develop information, and skill required 
to process different types of data manually. Accountants 
should also acquire familiarity with computers and operations 
research sufficient to understand their potential. 



174 



limitations and possible applications. Training for the 
functions not included in the suggested role (particularly 
the noninf ornational functions generally performed by 
accountants) may be de-emphasized. Their general attitude 
toward work should include a wholistic approach toward the 
organization and a disinterestedness in the information 
developed. ; . ? 

As a part of information control, data and information 
must meet standards of reliability, usability and authority 
(among which no trade-off is possible). These standards, 
together with some of the characteristics of information , 
systems and the attitude of information controllers toward 
their work, are compatible with most of the qualities of 
information advocated in the literature. These standards 
are explained in this chapter, and certain guidelines are 
provided for receiving feedback from users and for analyzing 
their information needs. 



CHAPTER VII 
SUMMARY AND CONCLUSIONS 

A business organization consists of three systems: 
one concerned with decision making, another with operations, 
and a third with information, all of which are interdependent 
and work in conjunction with each other. The first two use 
information as one of their inputs; and people outside the 
organization also need it. The purpose of the third system 
is to develop and communicate information to the various 
users. According to the concepts developed in this study, 
information may be defined as a symbolic representation of 
some real world state or event which when communicated to 
an individual adds to his knowledge. Additionally, the 
making of some decisions which are well structured and which 
can be handled in accordance with previously laid out pro- 
cedures is also delegated to the information system. 

Traditionally, accounting has been the only or major 
information system in business organizations, but in recent 
years many institutions have set up computer-based manage- 
ment information systems as an alternative to it. There is 
no specialized function assigned to accountants in these 
systems. Their growing use is, therefore, a matter of grave 



175 



176 

concern to the future of accounting as a distinct discipline, 
and a number of suggestions have been made in the literature 
to prepare accountants to face this challenge. On examina- 
tion it seems, however, that none of these makes quite clear 
as to how the accountant can continue to render useful ser- 
vices to business organizations in the modern environment. 
The present study addressed itself to the problem of deter- 
mining the role which accountants can perform effectively 
and profitably, as specialists in their own rights, in 
computer-based information systems. " 

In order to resolve the problem nosed, it was first 
necessary to determine why organizations are finding it 
necessary to seek an alternative to accounting. This re- 
quired an analysis of the capabilities as well as deficien- 
cies both of accounting and management information systems. 
An inquiry of this nature could have been made on the basis 
of an empirical study of one or a few organizations; but 
such a study would have been too limited in scope to permit 
adequate generalization. Reliance was, therefore, placed 
upon the numerous findings reported in the literature. 

The capacity and limitations of accounting are related 
directly to those of accountants. They utilize a number of 
techniques and procedures of financial accounting and manage- 
ment accounting to develop information. In this function, 
accountants are helped by their general attitude toward 
their work which encourages them to take a wholistic view 



177 

of the organization, to seek financial aspects of states 
and events that may be reported, and to remain disinterested 
in the information produced. They also make frequent use of 
professional judgment in the performance of their duties. 
The accounting system is able to generate information which 
meets with certain qualitative standards, such as relia- 
bility. The information is communicated to people entitled 
to receive the same. An attempt is also made to ensure that 
only usable information is so supplied and to make modifi- 
cations in the system in keeping with the changing needs of 
various users. However, the scope of accounting is gener- 
ally limited to financial information with the result that 
the users have to resort to other sources in order to obtain 
other types of information. Moreover, accountants are not 
usually versatile in the various techniques of scientific 
management -- and it may not be practicable for them to 
acquire expertise in all of the related areas. Because of 
this, they are unable to develop much of the sophisticated, 
quantitative information required by modern decision makers 
and other users. 

In sharp contrast to accounting, the capabilities and 
deficiencies of management information systems are related 
to those of computers and operations research methods which 
are the principal constituents of such systems. These sys- 
tems utilize various mathematical techniques to produce 
vast quantities of information \'iith. great speed and accuracy 



178 



and make it accessible to users by means of integrated and 
centralized data files, retrieval systems, and interactive 
devices. The procedures used include techniques such as 
model building, programmed decision making, and problem 
solving. However, such systems operate on the basis of 
established programs and lack a certain amount of flexi- 
bility. Moreover, in the absence of a proper integration 
of men and machines, there is no adequate insistence on the 
qualitative aspects of information (such as reliability), 
and there is a lack of people who can effectively communi- 
cate with and understand the needs of various users. One 
of the results is the production of an overabundance of 
irrelevant information. In many organizations, there is 
also an unbalanced development of managerial skills and 
information handling techniques so that the sophisticated 
information provided by MIS is not actually put to use by 
the recipients. 

A major conclusion that may be drawn from the fore- 
going is that in the modern environment neither accounting 
nor MIS as presently established is able to serve as an 
effective information system. There is still a need to 
evolve a model which would have the capability to develop 
various types of information and communicate them as per 
users' requirements. It should also have sufficient flexi- 
bility to modify itself in keeping with changing needs and 
be technically and economically feasible at all times. 



179 



This study has, therefore, attempted to develop a model, 
referred to as the controlled information system, which 
should be able to achieve these objectives. 

In the suggested model, the information system is 
divided into several subsystems. The input and output sub- 
systems control the acceptance of data and the communica- 
tion of information to users. The processing subsystem has 
two channels: one using the computer to perform the pro- 
grammed manipulation of quantitative data and the other to 
perform the nonprogrammed manipulation of such data as well 
as to manipulate nonquantitative data manually. The results 
of these two operations must be combined before they may be 
considered ready for reporting. The developmental subsystem 
utilizes feedback from users and from other subsystems, 
carries out operations research, and modifies the system as 
and when considered necessary. For a successful operation 
of the suggested model, it would be necessary to have people 
with specialized skills in three areas: computer operations, 
operations research, and information control. Information 
controllers would have the responsibility to control the 
input and output subsystems, to carry out the manual manipu- 
lation of data as well as to combine them with the computer- 
processed information, and to receive and interpret feedback. 

The tasks included in information control are quite 
similar to those performed by accountants in accounting 
systems except that the former would encompass a larger 



180 

variety of data and information. This study therefore con- 
cludes that in order to survive as members of a distinct 
discipline accountants should perform the functions of infor- 
mation controllers in the suggested model of controlled 
information systems. Additionally, they may make useful 
contributions to operations research, particularly in the 
identification of problems to be solved and the making of 
verbal models as well as in the solution control process 
and cost/benefit analyses. 

In order to successfully carry out the suggested role, 
the education and training of accountants would need to be 
such as to enable them to analyze the informational require- 
ments of various users, understand the data required to 
develop such information, and manipulate quantitative and 
nonquantitative data manually. They should also acquire 
sufficient familiarity with operations research and com- 
puters to understand the limitations and applications 
thereof. Their attitude should include a wholistic approach 
toward the organization and a lack of bias toward the infor- 
mation developed. A general interest in the financial 
aspects of states and events would be helpful in the per- 
formance of their duties. 

The responsibilities of information controllers include 
the function of ensuring that data and information meet with 
appropriate standards. For this purpose, three standards 
were suggested in this study: reliability, usability, and 



181 



authority (among which no trade-off is possible). Relia- 
bility is the certainty created in the mind of the user that 
the information corresponds with the state or event it seeks 
to represent. It may be thought of as a continuum, and 
information with various degrees of reliability may be 
reported for different purposes or to different users. To 
achieve this end, several levels of reliability may be estab- 

f 

lished, and data and information categorized accordingly. 
Usability refers to the potentiality of being understood and 
utilized by the recipient. Authority implies that only 
properly authorized data may be accepted into the system and 
that only authorized information may be supplied to people 
entitled to receive the same. 

To understand the informational needs of the decision 
making system it would be helpful to visualize the physical 
flow of money and goods and services so as to ascertain the 
decision points in that flow, and to determine the informa- 
tion required to make decisions at these points in accor- 
dance with the decision models adopted by the decision 
makers. 

Feedback from users would play an important part in 
keeping the system consistent with their needs. Recipients 
of information should, therefore, be encouraged to provide 
feedback relating to: (1) the differences between the infor- 
mation supplied by the system and that obtained by them from 
other sources or by direct observation, (2) information 



182 



supplied but not used, and (3) information needed but not 
supplied. 

Areas for Further Research 

Before the suggested model of the controlled informa- 
tion system can be adopted in practice and before accoun- 
tants can begin to be trained to act as information control- 
lers, considerable research still needs to be done. The 
following areas seem to be in the greatest need of further 
research effort: •< 

(1) Determination of the various levels of reliability 
of data and information and relating them to various uses 
and users . • , 

(2) Determination of the effects of the various pro- 
cessing techniques on the reliability of information. 

(3) Development of techniques to ascertain informational 
needs of various users and to study behavioral aspects of 
such needs. 

(4) Development of verification and authorization tech- 
niques and procedures for data and information of various 
types . 

(5) Development of concepts and techniques for carrying 
out cost/benefit analyses of information systems. 

(6) Development of concepts and techniques to deter- 
mine the desirability of programming the decisions. 



183 



(7) Exploration of the possibility of combining judg- 
mental factors with mathematical techniques. 

(8) Preparation of study materials for the education 
of information controllers and development of methods for 
their training. 

This study attempts to provide direction essential to 
a reshaping of the accounting discipline to better meet 
modern informational needs. It sees accountants as bring- 
ing to bear in the information science area some of their 
specialized attributes employed to improve the character of 
information provided management and others. Aside from its 
favorable impact upon information systems, this development 
should result in the construction of a base for the renewed 
and continued social utility of the accountant. 



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BIOGRAPHICAL SKETCH 



Surendra Prakash Agrawal was born January 21, 1936, 
at Chandausi, U.P., India. In 1950 he was graduated from 
Shyamsundar Memorial High School in Chandausi. He received 
the degrees of Bachelor of Commerce and Bachelor of Laws 
from Agra University in 1954 and 1956, respectively. In 
1958 he became an Associate Member of the Institute of 
Chartered Accountants of India and was admitted as a Fellow 
of the Institute in 1966. In September, 1969, he enrolled 
in the Graduate School of the University of Florida, and 
received the degree of Master of Arts in March, 1971. 

Sur'endra served his period of apprenticeship from 1954 
to 1957 with S. Vaish and Co., at Kanpur, India. He worked 
for Price Waterhouse, Peat and Co. at Calcutta, India, from 
1958 to 1966, and for the Institute of Chartered Accountants 
of India at New Delhi, India, from 1966 to 1969. At the 
University of Florida, he worked as a Graduate Research 
Assistant during the year 1969-70, received an Earhart 
Foundation Fellowship for the year 1970-71, and taught ele- 
mentary accounting courses from September, 1971, to March, 
1973, as a Graduate Teaching Assistant. Since then he has 
been working as Assistant Professor at tlie Florida Inter- 
national University at Miami, Florida. 

195 



196 



He has numerous publications both in the U.S.A. and 
in India and is a member of Beta Gamma Sigma. He is married 
to the former Vijaya Gupta and is the father of two children. 



" * , . 



I certify that I have read this study and that in my 
opinion it conforms to acceptable standards of scholarly 
presentation and is fully adequate, in scope and quality, 
as a dissertation for the degree of Doctor of Philosophy. 




Professor of Accounting 



I certify that I have read this study and that in my 
opinion it conforms to acceptable standards of scholarly 
presentation and is fully adequate, in scope and quality, 
as a dissertation for the degree of Doctor of Philosophy. 




laipt). ii. Hloc 
Professor of Economics 



I certify that I have read this study and that in my 
opinion it conforms to acceptable standards of scholarly 
presentation and is fully adequate, in scope and quality, 
as a dissertation for the degree of Doctor of Philosophy. 




Tyss 

Associate Profe 



r of Finance 



This dissertation was submitted to the Department of Account- 
ing in the College of Business Administration and to the 
Graduate Council, and was accepted as partial fulfillment 
of the requirements for the degree of Doctor of Philosophy. 

June, 19 73 



Dean , Graduate School